Offshore News Digest for Week of August 7, 2006

GLOBAL LIVING & BUSINESS

POST EUROPE CYPRUS: NO LONGER A JEWEL IN THE MEDITERRANEAN CROWN

Cyprus is a little island with a big ego. Its people somewhat conceited and aggressive. Maybe not surprising since this rock in the Eastern Mediterranean has been raped and pillaged over the last few thousand years – by the ancient Greeks (from whom the Cypriot culture was derived), the Romans, the Ottoman Turks, and the British - Richard the Lionheart married his Queen Berengaria in Limassol Castle on his way to the Crusades. Cyprus in its time has been variously handed over as a battle prize to glorious warriors, and a pawn in political intrigues. Although the island finally gained its independence in 1960 and became a Constitutional Republic, it still hosts a British military presence.

Sadly, despite its long history the island is keen to embrace all that is modern … and European. The Cypriots are very proud of themselves and their achievements. They rallied to accommodate the several thousand Greek Cypriots who were shoved south as refugees after the Turks invaded the northern part of the island in 1974. They have embraced the 21st century and have invested greatly in their infrastructure. They have educated their children to a high standard, and struggle financially to send them abroad to train as doctors, lawyers, dentists. The island has a big percentage of highly qualified professionals.

Cyprus finally joined the EU in May 2004, thus achieving a long sought after prize. Despite a last ditch effort to unify the the Turkish occupied north and the Cypriot Greek south, Cyprus entered Europe as a divided island. The U.N. plan was soundly rejected by the south with the powerful Greek Orthodox Church putting its weight soundly behind the “no” vote, while the Turkish north voted “yes”. “The Cyprus Problem” (the division of the island) remains front page news in every Cypriot paper, and uppermost in every Cypriot mind. It is a complicated and politically sensitivie issue.

The quest for European accession was to gain protection from the Turks, while the resulting economic problems were never alluded to. Prices have gone up and the tourists have gone down – Cyprus is no longer a cheap holiday destination. Old family run tavernas have closed down because they do not comply with EU Health and Safety standards, and a Starbucks coffee in Limassol is more expensive than the same one in London! And there is a very long way to go before the island can boast a clean environment. Once upon a time the cost of living in Cyprus was about 50% lower than that in the UK – now it is pretty much the same.

As a European passport holder you can move to Cyprus to live and work, but you can only work if the job you are employed to do cannot be done by a Cypriot. You can start your own business, now without a Cypriot holding the major share, but you have to live and pay tax in the country for 7 years before you are entitled to any benefits, health or otherwise. Income tax has increased and you are now taxed on your worldwide income, from all sources, not just on what you earn in the country. Foreigners are tolerated on the surface (you would not want to be Sri Lankan or a Philippino) and get used to a different price structure: one for locals, one for foreign residents and one for tourists.

One of Cyprus’s biggest assets is the lack of crime. Sadly though, I fear even this will change. The demographics of the country have changed immeasurably in the last few years…an influx of less well off Eastern Europeans looking for a better life, and with a mixing of cultures comes an increase in crime. Expatriot owned villas in the Pafos area now sport locking gates and burglar alarms. The island’s other asset is, of course, the sea-magical, beautiful, but not thus far treasured as the jewel it is. The Mediterranean is all but dead, with few fish. Those consumed in Cyprus are either “farmed” or imported. Dreams of sitting by the sea eating cheap, local seafood will be dashed.

The ocean and potentially stunning beaches, along with the island’s heritage and architecture should be polished and preserved for future generations. But sadly, all the things that are good about Cyprus – peace, tranquility, village life, its ancient history and culture – are being engulfed by this desperate need to be European. Of course, I am just a visitor and have had the best of this little escape.

FOR REAL ESTATE BARGAINS, LOOK NO FURTHER THAN CROATIA

All of Eastern Europe, both EU and non-EU members alike, continue to attract real estate investors from all over the world. But the real value lies in those Eastern European countries which are not part of EU yet, countries like Bulgaria, Romania and – in particular – Croatia. The Republic of Croatia is located in the heart of Europe, where it is easily accessible by air, road and sea. The country occupies an area only slightly larger than Switzerland, but it has a spectacular 6000 km (3728 mile) coastline on the Adriatic Sea with almost 1200 islands, including 1134 which remain untouched and uninhabited. The coast is known as “Europe’s Secret Coast”, with its crystal blue, 77 degree waters. The ocean’s ideal temperatures echo its sunny climate – with the majority of the islands receive more than 2600 hours of sunshine a year.

Croatia’s tax climate rivals its weather. Croatian tax laws allow foreign investors to live tax-free as long as they collect their income, pensions or capital interest from outside Croatia. These tax advantages are relatively unknown, which means you can establish a tax-free residence in a high-tax country while keeping a low profile. Furthermore, the Croatian cost of living is still low and the Croatian people are friendly and open-minded, making this an intriguing nation to retire.

Croatia was one of the two largest states in the former Yugoslavia. When Croatia declared independence in 1991, a 4-year war followed. Although most of Croatia remained untouched by the war, the nation still has somewhat a stigma as a “former war zone”. This poor reputation is completely unjustified, but it may work in your favor. This stigma still chases other investors away, while you can profit the unique real estate investment opportunities in Croatia and particularly the Dalmatian coast. For example, you can buy prime land for less than 2 Euros ($2.50) per square meter in certain sections, and take advantage of the excellent real estate deals in the tourism sector. Before separating from Yugoslavia, Croatia had a well-developed tourist industry attracting about 10 million visitors annually. War devastated Croatia’s tourism, but as the industry continues to recover, you can take advantage of the real estate bargains.

Croatia is now a sovereign state and a member of the U.N. The political, social and economic situation is rapidly improving. Neighboring Slovenia, also a former state of the now defunct Yugoslavia, already joined the EU in 2004. In the past few years, Slovenia has seen a spectacular rise in real-estate prices, implying that Croatia’s real estate prices will spike once they join the EU. Slovenia also boasts extremely beautiful properties, but Slovenia simply does not compare to the overwhelming beauty and the enormous tourism potential of the Dalmatian coast and Croatian islands.

World Wildlife Fund (WWF) marine biologist Paolo Guglielmi said that some parts of the Mediterranean, such as the Middle East, Spanish or Italian coastal areas, “are already lost forever. … But we have identified 10 last paradises that are still remarkable for their biodiversity and are worth huge efforts to save.” Among them are Vis and two other southern Croatian islands, Lastovo and Mljet, where so far tourism has not disrupted the environment. Besides the clean sea and beautiful coast, there is also a rich culture, and there are many historic places.

The political atmosphere is also attractive for real estate investors. The Constitution of Croatia provides for a solid parliamentary democracy and guarantees the right and inviolability of private property. Also, the constitution guarantees the rights acquired through capital investment. Thus free transfer and repatriation of profits and capital are guaranteed to foreign investors. Foreign persons can purchase Croatian real estate providing they get an approval by the Ministry of Foreign Affairs. Such approval may take up to nine months. However, you can easily and legally avoid the restrictions if you buy the property with a Croatian company, which can be entirely owned and controlled by a foreign person. Using a company for this purpose also avoids capital gains tax and the 5% transfer tax on the subsequent sale of the property. With a view towards future EU-membership, the current restrictions on foreign real estate ownership will be abolished in less than two years. Without a doubt, this like all other convergence measures will make Croatia increasingly accessible, and this will accordingly have an inevitable positive effect on the real estate market.

Overall, real estate in Croatia is very attractive as prices are still cheap compared to sky-high real estate in Spain, France and Italy. With Croatia on the road to becoming an EU member, you can expect Croatian real estate prices to jump 100 to 150% in the next 3 to 5 years and more in some key locations.

BELIZE INTERNATIONAL BONDS TUMBLE ON DEFAULT CONCERN

Belize’s international bonds have tumbled 25% this year on concerns the government will default on $960 million of foreign currency debt. The yield on the country’s 9.5% bond that matures in 2012 has climbed to 17.15% from as low as 11% in February. The bonds traded today at a price of 72 cents on the dollar, down from 92 cents on February 9.

Belize, which spends 27% of government revenue on servicing its debt, had its credit rating lowered to CC on Aug. 4 by Standard & Poor’s, leaving it two levels shy of a D rating, the lowest possible. The government on August 2 said it would seek to restructure its international bonds. “I am happy to say we do not own any of their bonds,” said Daniel Hewitt, an economist with New York-based Alliance Capital Management LP, which manages about $163 billion in fixed income securities and has about $9 billion in emerging market debt. “We sold out because we realized they were going to default.” Alliance Capital owned an “awful lot” of Beliz’qs international bonds and sold them all earlier this year before the bond price dropped, Hewitt said.

Belize’s debt represents more than 90% of GDP. Negotiations with creditors may be difficult, according to New York-based S&P. “Obviously, for the government the larger the haircut the better they will be in terms of being able to make payments, though that’s obviously not what you want if you are an investor,” Richard Francis, an analyst at S&P in New York, said in a telephone interview. Francis said the government ran out of money after trying to spark economic growth by investing in infrastructure projects. At the same time, the government stepped up spending to help repair damages sustained during the hurricane season.

Belize had a budget deficit equal to 3.1% of GDP in the fiscal year ending in 2006, down for a deficit of 8% in the previous period, the Finance Ministry said on August 2. “Even with these belt-tightening measures, however, Belize is projecting significant fiscal deficits over the medium term,” the ministry said.

Sugar, citrus fruit and juice, and bananas account for about 60% of Belizeafs annual exports, half of which are sent to the U.S. The country relies on tourism for about a fifth of the country’s annual GDP. The country’s $2.2 billion economy expanded as much as 4.5% last year. “I don’t feel they have made enough of a fiscal adjustment to deal with the magnitude of problems they have,” Hewitt said. “They didn’t realize their problem soon enough and deal with it.”

Belize seeks debt relief from private sector lenders.

The government of Belize is attempting to seek the cooperation of the country’s private sector creditors in a rearrangement of Belize’s approximately $1 billion external debt stock. The government expects that most of the external commercial debts of Belize and its public sector entities will be affected by this debt rearrangement. The government of Belize is simultaneously approaching its official-sector creditors to solicit their assistance in addressing the country’s currently unsustainable debt burden.

Belize’s ratio of debt to GDP is just over 90%. Much of this debt has accrued as the government repaired damage caused by a spate of hurricanes between 1998 and 2002. The country spends, on interest payments alone, more than 27% of the Government’s fiscal revenue. “Servicing of the Belizean external public sector debt stock on its existing terms is no longer a viable option,” explained Said Musa, Prime Minister and Minister of Finance. “We must urgently ask the cooperation of our creditors to help put this debt stock on a sustainable financial footing.”

CAYMAN ISLANDS GOVERNMENT ENTERS DEBATE ON U.S. PASSPORT INITIATIVE

The government of the Cayman Islands has joined the Caribbean Tourism Organization (CTO), the International Council of Cruise Lines and other leading travel organizations in opposing the phasing in of the U.S.’s Western Hemisphere Travel Initiative (WHTI). The WHTI, which is due to take effect on January 1 next year, will make it mandatory for all Americans returning home from the Caribbean and other countries in the Western Hemisphere to have a passport to enter their country.

Regional tourism officials, working through the Caribbean Community Council for Foreign and Community Relations (COFCOR) and Caribbean ambassadors in Washington, successfully argued against the original implementation date of January 1, 2006, saying it put the region at a disadvantage, since Americans returning from Mexico and Canada by air would not need a passport before January 1, 2007. Those returning from the two U.S. border states by land have been given an additional year, and will require a passport by January 1, 2008.

In a recent visit to Washington DC, Tourism Minister Charles Clifford participated in rounds of talks on Capitol Hill with key bipartisan senate and congressional representatives. “All of our meetings confirmed that there is strong bi-partisan support to review and defer the implementation date of the WHTI in favour of a consistent roll-out date for air, sea and land travel later than 1 January 2007,” Clifford told members of parliament. “While no definite answer could be provided, the representatives were particularly sensitive to the issues this created for Caribbean destinations as well as the cruise industry which would be negatively impacted by the proposal in its current form.”

Monitoring visitor arrivals with the Immigration Department and the cruise lines, the Cayman Department of Tourism has learned that the majority – some 80% – of stay-over visitors currently travel on passports. While not confirmed, the anticipated percentage of non-passport holders is expected to be significantly higher for cruise arrivals, Minister Clifford said. The Minister reiterated that any policy that negatively impacts arrivals by air or sea “or which acts as a disincentive to travel to the region due to perceived additional obstacles and burdens is an unacceptable risk.”

ANDORRA TRIES TO SHAKE OFF ITS SHADY IMAGE

Andorra, the tiny Pyrenees principality best known for its skiing and duty-free shops, is to open its borders to foreign investment as part of a reform program aimed at modernizing the economy and changing its image as a shady financial center. Legislation before parliament should also lead to the introduction of corporate tax – envisioned at about 12% – and a registry to which local business will be required to file regular accounts using international standards. Personal wealth, however, will remain beyond the reach of the taxman, ensuring the country’s future as a domicile for retired Europeans and the exceedingly wealthy.

Of its 80,000 inhabitants nearly 65% are foreigners – mainly Spanish, Portuguese and French but with a growing community from the UK. Its per-capita GNP was €29,000 in 2004, compared with a EU average of €22,000. The OECD has Andorra on its list of uncooperative tax havens, a classification that has taken on more sinister connotations since the 2001 attacks in the U.S. The hunt for al-Qaeda and other networks thrust small, secretive and tax-efficient countries such as Andorra, Liechtenstein and San Marino under the spotlight as possible sanctuaries for terrorist financiers.

However, Albert Pintat, the center-right prime minister of Andorra, says the changes are aimed less at cleaning up the country’s “undeserved” reputation for financial opacity and more at fostering economic diversification in a country that relies on skiers and duty-free tourists for about 90% of its €2 billion GNP. “This is all about our future survival,” he said. “As an economic region we could probably continue to get by. However, as a European sovereign state in the western world we have to move with the times.”

Andorra, about half the size of New York City, was once intended as a buffer between France and Islamic Spain. For 700 years it was co-ruled by the French head of state and Bishop of Urgell. Since 1993, when it adopted a constitution, it has been moving towards joining the European mainstream. Over the next year it will lift caps on foreign investment in saturated sectors such as duty-free retailing and tourism from 33% to an initial 49.9%. For new sectors the ceiling will be lifted immediately from 33% to 100%. Andorra’s difficult topography, delicate environment and limited space precludes the investment in heavy industry, such as car plants, that helped revive depressed areas across the border in northern Spain. However, good social infrastructure, schools and hospitals, a largely polyglot workforce, clean air and deep broadband penetration make Andorra the country an attractive for base for high-end service industries, according to Mr. Pintat.

In spite of the drive to become “more European”, Mr. Pintat says the country is in no rush to become a full member of the EU, which he says is blighted by bureaucracy, discontent and national self-interest.

BRITISH BANKING COMPANY AGREES TO BUY PANAMA’S BIGGEST BANK

HSBC Holdings agreed to buy Panama’s largest bank, Grupo Banistmo, for $1.77 billion in cash to enter five countries in Latin America, its fastest-growing market. The purchase will give HSBC 220 branches in Colombia, Costa Rica, El Salvador, Honduras, Nicaragua and Panama. The acquisition is the biggest purchase in Latin America for HSBC, which has developed from a regional lender in Asia to the world’s No. 3 bank through more than $60 billion of deals in the last decade.

“They understand the region and have been very successful in Brazil and Mexico,” said money manager Richard Peirson. Revenue at HSBC’s Latin American units, which include operations in Argentina, Chile and Uruguay, grew at an average 50% pace in the last two years. Latin America contributed $647 million, or 3.1%, to the bank’s 2005 pretax profits. The chairman of HSBC, Stephen Green, said the bank was betting on future growth tied to the Central American Free Trade Agreement with the U.S.

DUBAI FIRMS PLAN PANAMA VENTURES

Dubai is looking at investing in the $5-billion expansion plans of the Panama Canal as part of a string of projects being considered in Panama by several Dubai government entities. Investment firm Istithmar could participate in the project, said Sultan Ahmad Bin Sulayem, chairman of holding company Dubai World that groups a number of business units. In its biggest expansion since it opened in 1914, the 80 kilometer Panama Canal would be widened to accommodate some modern vessels that are too wide to go through the canal at present. Ships that can pass have to queue for hours because of congestion on the canal, which handles nearly 5% of global sea trade.

Dubai is also considering developing new port facilities, industrial zones, shipyard and drydock facilities, real estate projects and a commodities exchange in the Central American country, said Bin Sulayem, who discussed possible investment opportunities during a meeting with President Martin Torrijos in Panama City. During his talks with Panama Commerce and Industry Minister Alejandro Ferrer, Bin Sulayem discussed investments in two free trade zones, ports and logistics parks and tourism projects. The Panama visit was part of Bin Sulayem’s regional tour that also covered Peru, Venezuela, the Dominican Republic and Argentina.

ST. KITTS AND NEVIS COURTS FINANCE INDUSTRY IN SWITZERLAND

The government of St. Kitts and Nevis has sent a delegation of senior representatives, including Prime Minister and Minister of Finance, Dr. Denzil L. Douglas, to tout the jurisdiction’s offshore sector in Switzerland. The delegation, led by Dr. Douglas, headed to Zurich in an effort to boost the financial services sector, regarded by the Caribbean jurisdiction’s government as one of the major pillars of the new economy. The Prime Minster was accompanied by Director of Marketing and Development, Ms. Shawna Lake, who gave an overview of the St. Kitts Financial Services and London-based International Ship Registrar, and Mr. Nigel Smith, who spoke on the International Ship Registry Services.

According to Ms. Lake, St. Kitts and Nevis has made steady progress in developing its financial services sector since securing its removal from the FATF and OECD blacklists in 2002. St. Kitts had 1,680 companies on the register as of 31st December 2005. Ms. Lake said that over 150 ships have been registered in the jurisdiction since the introduction of the International Ship Registry in 2004.

The Caribbean Development Bank has calculated that economic growth remained at a healthy level in St. Kitts and Nevis in 2005 as several sectors of the economy contributed to growth. Real economic growth is estimated at 4.8% in 2005 compared to 6.4% in 2004. Tourism and related services and construction contributed most to economic growth last year, while banking and insurance services also expanded.

U.S. TRADE REPRESENTATIVE WELCOMES APPROVAL OF VIETNAM TRADE MEASURES

Speaking earlier this week, U.S. Trade Representative Susan Schwab welcomed the Senate Finance Committee’s approval of legislation to authorize the granting of permanent normal trade relations with Vietnam, in an 18-0 vote. She announced, “I … welcome the committee’s approval of Permanent Normal Trade Relations (PNTR) for Vietnam, and urge the Congress to move to a final vote expeditiously. PNTR will facilitate Vietnam’s accession to the World Trade Organization and integrate this economically vibrant country into the global community of trading nations. Vietnam’s accession will also open up exciting new trade and investment opportunities for American companies and workers in this fast-growing market of more than 80 million people.”

Vietnamese decree complicates life for foreign rep offices.

The Government recently issued Decree #72 on representative offices and branches of foreign business entities in Vietnam. Representative offices are the simplest and most popular presence for foreign companies in Vietnam. Such companies are not permitted to conduct operations generating profits. The role of the representative offices is to promote business opportunities for the parent company and monitor performance of contracts that the parent company has entered into with Vietnamese enterprises. Vietnam should encourage the establishment of rep offices as they are often used by foreign companies to test the market before committing to large investment projects. Unfortunately, Decree #72 makes it harder, not easier, to establish and operate rep offices in Vietnam.

GIBRALTAR-BASED PARTYGAMING DIVERSIFIES CLIENT BASE WITH NEW ACQUISITION

PartyGaming, the world’s largest online gaming company, announced last week that it has acquired the business and assets of Gamebookers, an online sports betting business, from Trident Gaming PLC for an estimated net cash consideration of €102 million ($130.4 million). Established in 1999, Gamebookers provides online sports betting in 12 languages and has more than 250,000 registered customers in 140 countries and 53,318 active customers. Significantly, the company does not accept bets from punters based in the U.S., where regulators are cracking down on illegal gambling.

Commented Mitch Garber, CEO of PartyGaming, “Gamebookers is a well-established and profitable operator with proven risk management skills and scaleable proprietary software. We believe that sports betting will be a valuable addition to our integrated gaming platform, which we expect to provide excellent cross-selling opportunities for our expanding base of customers outside the U.S.”

The business offers single, combination and live bets on a wide range of international sporting events. In the 12 month period ended 31 December 2005, the business took over 25 million sports bets, equivalent to an average of 124 bets per customer per month, with an average bet size of €7.10. The business also operates a small but growing online casino, and recently added a poker room. Gamebookers’ sports betting activities currently operate under an Antiguan gaming license, and the majority of the operations, risk management and customer services are run by a cost-effective in-house processing center in Bulgaria. In the year ended 31 December 2005, Gamebookers took wagers of €179.4 million net of bonuses, generated gross wins of €10.1 million, and produced earnings before interest, taxes, depreciation and amortization (EBITDA) of €4.6 million.

MONEY LAUNDERING THREAT TO FIJI’S FINANCIAL AND SOCIAL SYSTEM

Money laundering is a serious threat to Fiji’s financial and social system according to State Minister for the Prime Minister’s Office, Losena Salabula. In her contribution on the Real Estate Agents Bill in Parliament, Mrs. Salabula said if the issue were allowed to go unchecked, a substantial part of the ratepayers will be affiliated to international crime syndicates. “The Bill before us is part of the continuing effort by our Government to ensure our financial, political and social stability. It is our duty to place laws to protect our people from unscrupulous practices of the few real estate agents who engage in poor service standards, dishonest and unethical practices,” she said.

BIG INTERNATIONAL BANKS FLOCK TO NEW DUBAI SPECIAL FINANCIAL DISTRICT

Another land rush is under way in Dubai, but this time those clamoring for a toehold in this boomtown are international banks based everywhere from New York to London, Zurich and Tokyo. More than three dozen international financial firms have set up offices in this Gulf city’s futuristic new financial district since the government’s Dubai Financial Services Authority (DFSA) began issuing licenses in 2004. Among them are Morgan Stanley, Merrill Lynch, Credit Suisse and Deutsche Bank. Several more, including HSBC, Goldman Sachs, Lehman Brothers and Japan’s Sumitomo Mitsui have announced plans to open offices in the 110 acre, Vatican-like enclave on the Gulf that is governed by western-style financial laws enforced by its own courts and judges.

Banks are eager to begin doing business even though the district is half-built. Omar bin Sulaiman, governor of the Dubai International Financial Center (DIFC), said the district’s growth had surprised even its Dubai government owners. Bin Sulaiman and others say the district’s rapid development results from strong economic growth in the underserved region. “This is a market that’s coming of age,” said Georges Makhoul, Morgan Stanley’s Dubai-based head of banking in the Mideast and North Africa. “There are opportunities here wherever you look. There’s been pent-up demand for banking services that weren’t previously available to companies here.”

Morgan Stanley is doubling its 22-person staff in Dubai as it readies to dabble in the booming Islamic finance market, Makhoul said. The New York-based bank also plans smaller branches in neighboring Qatar and Saudi Arabia, he said. Islamic finance is simply banking and investment that complies with Islamic law, which bans interest. Most Islamic products are similar to conventional ones, except investors receive profit shares rather than interest payments. Islamic finance, said Makhoul, “is here to stay.” Morgan Stanley was looking to develop sophisticated Islamic financial “instruments” that involve securitization, or borrowing against a company’s future revenue.

The banks join tens of thousands of foreigners, mainly Europeans and Asians, who flocked here to buy luxury homes and apartments after this cosmopolitan city opened its property market in 2002. To bring in big banks, the Emirates amended its constitution to declare the country’s commercial law invalid on the area of the DIFC. Instead, laws written by the DFSA are enforced here, and disputes are settled in the DIFC’s own courts. DIFC-based banks are prohibited from doing business in the Emirates currency, the dirham, a move meant to appease local banks worried about competition. The DIFC’s official currency is the U.S. dollar.

Among factors that lured banks to Dubai are the new district – with its rules based on the familiar code of the U.S. Security and Exchange Commission – sophisticated banking opportunities and stock markets that did not exist a decade ago, including the dollar-denominated Dubai International Financial Exchange, or DIFX. But mostly, the banks are here because the energy-rich Gulf is loaded with cash. “There is just a huge amount of money here,” said DIFX spokesman Mark Fisher. “If you’re an international bank, you can’t afford to overlook this part of the world anymore.”

With the influx of banks, DIFC looks as if it will eclipse the island kingdom of Bahrain as the Gulf’s banking center. Nearby Qatar, too, has set up a banking center with Western-style regulation. Bahrain remains the headquarters for many regional banks. “There are compelling reasons to have a presence in this region,” said Cyrus Ardalan, who heads Barclays Capital’s operations in the Mideast, Eastern Europe and Africa. “But Dubai had the vision. They have a clear view of where they want to go and they go for it. They want to be best in class.”

TAXES

U.S. SENATE FINANCE COMMITTEE KICKS OFF TAX REFORM DEBATE

The Senate Finance Committee has kicked off the first in a series of hearings exploring the subject of possibly far-reaching reform of the U.S. tax code. Attending last week’s hearing were Connie Mack and John Breaux, chairman and vice chairman respectively of the presidential tax reform panel, which reported its recommendations last November, David Walker, U.S. Comptroller General, and Dr. Jane Gravelle, an economist at the Congressional Research Service. While finance committee chairman Chuck Grassley stated that he has no preconceived notions as to which direction tax reform will take, the hearings, which will take place in the fall, are likely to focus on the two proposals offered by the tax reform panel.

The first plan, known as the “Simplified Income Tax Plan” proposes to:

• Reduce the number of income tax brackets to four at 15%, 25%, 30%, 33%.
• Exclude 100% of dividends of U.S. companies paid out of domestic earnings.
• Exclude 75% of corporate capital gains from U.S. companies (the tax rate would vary from 3.75% to 8.25%).
• Tax interest at regular income tax rates.
• Tax small businesses at individual rates (top rate lowered to 33%).
• Tax large businesses at 31.5% under a territorial system with simplified accelerated depreciation.

The second plan, known as the “Growth and Investment Tax Plan” proposes:

• Three tax brackets – 15%, 25%, 30%
• Dividends, capital gains and interest income all taxed at 15%.
• Sole proprietorships taxed at individual rates (top rate lowered to 30%).
• Other small businesses taxed at 30%.
• Large businesses taxed at 30% on a destination basis with expensing for all new investment.
• Interest paid and received will be non-deductible except for financial institutions.

Both plans also call for the elimination of the Alternative Minimum Tax, a shadow tax system originally designed to ensure that wealthy individuals cannot reduce their tax liability to zero through deductions and tax breaks. However, since the tax is not indexed to inflation, it is beginning to eat into the ranks of the middle income earners, and it is projected to raise the taxes of more than 21 million taxpayers in 2006 and 52 million taxpayers by 2015. However, since President Bush has stipulated that tax reform must be revenue neutral, it is expected that the elimination of the state and local tax deduction will have to pay for the removal of the AMT.

Comptroller General David Walker argued that reform will help increase rates of compliance with the tax system by making it easier to understand and eliminating loopholes. “The complexity of, and frequent revisions to, the tax system make it more difficult and costly for taxpayers who want to comply to do so and for the IRS to explain and enforce tax laws,” he stated. “Complexity also creates a fertile ground for those intentionally seeking to evade taxes, and often trips others into unintentional noncompliance.”

It remains unclear when Congress will get the opportunity to work on tax reform legislation. The Treasury Department is charged with studying the reform panel’s tax proposals and recommending what it considers to be the best option to President Bush. However, the department has given little indication of when this will happen.

U.S. Comptroller General urges tax increases.

Giving testimony before the Senate Finance Committee last week, U.S. Comptroller General, David Walker argued for a different approach to boosting the nation’s economy than the tax-cutting regime currently espoused by the Bush administration. “One of the biggest problems we have right now is we have this false theory that every tax cut is going to stimulate economic growth and they’re going to pay for themselves,” he told senators.

Meanwhile, speaking with regard to the thorny issue of reforming the tax system, he stated, “As the Committee is well aware, two fundamental objectives of a tax system are (1) to raise revenue sufficient to fund projected spending and (2) to do so in a manner that is fair, relatively easy to administer, and minimizes negative effects on the economy. Unfortunately, over time, the accumulated changes to our individual tax system have not been consistent with these objectives and, not surprisingly, there is a growing debate about the fundamental design of the current tax system.

“The debate about the future tax system is partly about whether the goals for the nation’s tax system can be best achieved by reforming the current income tax so that it has a broader base and a flatter rate schedule, or switching in whole or in part to some form of a consumption tax. The President’s Advisory Panel on Federal Tax Reform has taken a major step in beginning this debate.”

IRS DIPS INTO TIP JAR

The IRS last week released formal guidance on its new tip reporting procedure, the Attributed Tip Income Program (ATIP). ATIP aims to reduce industry record-keeping burdens, has simple enrollment requirements and promotes reporting tips on Federal income tax returns. ATIP provides benefits to employers and employees similar to those offered under previous tip reporting agreements. However, it does not require employers to meet with the IRS to determine tip rates or eligibility. Employers who participate in ATIP report the tip income of employees based on a formula that uses a percentage of gross receipts, which are generally attributed among employees based on the practices of the restaurant.

Employees also benefit from ATIP, as participating employees do not have to keep a daily tip log or other tip records, and the IRS will not initiate a tip examination during the period the employer and employee participate in ATIP. In addition, the improved income reporting procedures could help employees qualify for loans or other financing.

U.S. HOUSE COMMITTEE SLAMS “INCOMPETENT” TAX REFUND FRAUD DETECTION SYSTEM

A four month investigation by the House Ways and Means Committee into the IRS’s contract with Computer Sciences Corp (CSC) to develop a computerized tax refund fraud detection system has uncovered “incompetence at all levels” and hundreds of millions of dollars in lost tax revenue. CSC had not only missed a deadline to complete the new system in time for the 2005 tax filing system, but also missed an extended deadline of January 2006, meaning that there has been no electronic fraud detection system in place for either of the last two tax filing seasons. About $227.5 billion in tax refunds were issued in 2005 alone.

The IRS has estimated that between $200 million and $300 million in fraudulent tax refunds were paid out last year. However, a report due to be released by the Treasury Inspector General for Tax Administration will show that the actual losses were $318 million, according to sources familiar with the forthcoming report. In a letter by House Ways and Means Committee Chairman Bill Thomas to Treasury Secretary Henry Paulson, it was suggested that “now would be a good time for the government to reexamine the dependence of the IRS on the CSC and determine whether the federal government is best served by this particular contractor.” Thomas also stated that a lack of oversight on the part of the IRS was also as much to blame for the debacle.

IRS AND CANADIAN TAX AUTHORITIES WORK TOGETHER TO UNRAVEL “ABUSIVE” SCHEME

Officials of the Canada Revenue Agency and the IRS announced significant progress in unraveling an abusive cross-border tax scheme. This effort stems from leads and information first developed by the Joint International Tax Shelter Information Center (JITSIC). The scheme in question involves hundreds of taxpayers and tens of millions of dollars in improper deductions and unreported income from retirement account withdrawals. U.S. and Canadian promoters have been marketing the scheme on both sides of the border to individual investors, ranging from middle to high-income individuals.

Under the scheme, investors purchased what appear to be high-yield offshore investments through offshore corporations and foreign bank accounts. Typically, investors made these purchases using cash or proceeds from withdrawals, allegedly tax free, of retirement funds (RRSPs in Canada, IRAs in the U.S.). Investors also made purchases through using tax refunds improperly generated by alleged losses claimed for natural resource industry investments.

CRA Commissioner Michel Dorais said, “Tax administrations in many parts of the world are working together to detect and shut down abusive tax schemes. Promoters who believe they can play one country against another in developing tax schemes should beware.” IRS Commissioner Mark W. Everson added, “The real time exchange of information, including the identities of promoters and hundreds of investors has been critical to this investigation. JITSIC is emerging as an important part of efforts to combat abusive schemes.” JITSIC was established in 2004 by the tax administrations of four countries, Australia, Canada, the U.K. and the U.S., to supplement the ongoing work of the countries’ tax authorities in identifying and curbing abusive tax schemes.

IRS WINS KEY COURT BATTLE IN TAX SHELTER WAR

The IRS has won a key victory in its war against abusive tax shelters, after a U.S. appeals court overturned a previous ruling in favor of Coltec Industries Inc., a former subsidiary of Goodrich, a major manufacturer of aircraft landing systems. The three judges on the U.S. Court of Appeals for the Federal Circuit panel agreed with the IRS that Coltec had used a transaction known as a contingent liability deal to artificially generate capital losses which the firm then used to offset capital gains from the sale of a business unit in 1996.

Applying the much-debated “economic substance” test, the judges wrote that the law as it stands “does not permit the taxpayer to reap tax benefits from a transaction that lacks economic reality.” The judges went on to write that a lack of economic substance “is sufficient to disqualify the transaction without proof that the taxpayer’s sole motive is tax avoidance.”

Their decision overturns a judgment by Judge Susan Branden in the U.S. Court of Federal Claims in 2004, which rejected the IRS’s argument that the transactions had no economic purpose. Branden stated that, in her opinion, Coltec had complied with all the statutory requirements laid down by Congress and awarded the company an $82.8 million refund. The latest ruling was welcomed by Assistant Attorney General Eileen J. O’Connor as a major boost for the government in its ongoing fight against abusive tax avoidance.

Goodrich has 45 days to request further review by the U.S. Court of Appeals and 90 days to request that the U.S. Supreme Court review the decision. In the event that the government ultimately prevails in the case, Goodrich may be required to make cash tax payments, including interest (net of federal benefit), of approximately $50 million, based on accrued interest through June 30, 2006.

ISLE OF MAN MAY CAP CORPORATION TAX FOR FINANCIAL INSTITUTIONS

The Isle of Man’s Treasury has released the results of a consultation on capping corporate tax liabilities for financial institutions. The response, not surprisingly, was favorable. The aim of the consultation was to seek views about the proposal to cap corporate tax liabilities at a level above the current highest payer, therefore ensuring that current revenue receipts are not reduced. The Isle of Man now has a standard rate of 0% income tax for corporate taxpayers, however a small number pay income tax at 10%. This includes companies holding banking licences and those receiving income from land and property in the Isle of Man (which includes rental income, extraction of minerals and property development). No one was opposed to the idea, while some responses were cautiously supportive and several were very enthusiastic.

One response did suggest that this should only be an interim measure which should not detract from the aspiration to make all of industry subject to a zero rate of tax. They also suggested that a “floor” as well as a “ceiling” would be appropriate and would attract smaller start ups, which would in turn bring more highly qualified staff with them. A cap of at least £6 million, just above the current highest tax paid by a company, had been suggested in the consultation document. Two responses requested that a cap should be revenue neutral and recognized that this would not affect established Island companies. However, it may attract new banking business.

HONG KONG GOODS AND SERVICES TAX PROPOSAL SPARKS STREET PROTEST

Thousands of demonstrators took to the streets of Hong Kong to protest against the government’s proposal to introduce a GST in the territory. The pro-business Liberal Party, which organized the march, claimed that as many as 10,000 people, including local businesses operators, traders and retailers took part, although a spokesperson from the police department stated that the number taking part was closer to 3,000.

Bearing placards with slogans such as “Say no to the sales tax” and “No GST” the protestors handed in a petition at the government headquarters. They argue that the proposed levy, expected to be 5%, will harm the lucrative tourist trade. Miriam Lau, deputy chairwoman of the Liberal Party, said that the protest was the first of many.

In a statement, the Financial Services and the Treasury Bureau said that the proposals put forward in the tax reform consultation document are not meant to be conclusive, but are intended to stimulate “rational and informed discussion” on the issue. “Hong Kong must make good use of the respite provided by the economic recovery to act now so that the city’s public finances will be better able to withstand future economic and social challenges,” the bureau stated. “The city must act now to broaden its tax base for the future prosperity of Hong Kong …”

U.K.’S TAX AUTHORITY WANTS TO CONSOLIDATE, EXTEND ITS POWERS

HMRC has published a consultation document setting out how the powers and accompanying safeguards used in the investigation of tax crime could be updated. HMRC is responsible for investigating suspected criminal activity across the whole range of its responsibilities, including investigating tax credit fraud and VAT fraud, which can involve organized crime. Currently, its powers and their associated safeguards are only available for specific taxes and duties. Having the same law apply across the board will be clearer for those under investigation and will increase the effectiveness of HMRC’s investigations, says the agency. Current powers do not apply in Scotland, and views are also sought on the provisions that would provide an effective and fully integrated regime that is appropriate for Scotland’s legal system.

Research highlights U.K. government’s inheritance tax grab.

New research by the UK’s Halifax Bank based on recently released data from HM Revenue and Customs, shows that the total number of estates paying IHT rose by 72% over the five years to 2003-4 to more than 30,000. As the IHT threshold, currently £285,000, fails to keep pace with increasing house prices, the government’s own estimates suggest that the number of estates caught in the IHT net will rise by a further 22% by the end of 2006-7.

Halifax’s research also finds that the less affluent households are being hit harder than the wealthy. The number of estates with a value of less than £500,000 paying IHT rose by 75% over the five years to 2003-4 to 21,750. These estates now account for 71% of all estates paying IHT.£In 2003-4, 8% of all estates worth less than £500,000 paid IHT, up from only 5% in 1998/99. The average amount of IHT paid by these estates was £31,393. Estates valued less than £500,000 accounted for 25% of total IHT revenue in 2003-4 – £683 million.

Estates worth more than £2,000,000 accounted for 19% of total IHT revenue in 2003-4, down from 23% of total IHT revenue in 1998-9. Estates valued between £500,000 and £1,000,000 generated the most IHT revenue in 2003-4, 33% of the total. Last financial year (2005-6) the government collected £3.3 billion in IHT revenue and projects £3.6 billion in revenue in the current financial year. Over the past five years there has been a 49% increase in IHT revenue.

TAIWAN TO CRACK DOWN ON TAX EVASION, TARGET HIGH INCOMES

Minister of Finance Ho Chih-chin announced the government will establish an advanced system for checking tax payments next year to crack down on tax evasion. The measure, which mainly targets major tax evaders, should increase state revenue by NT$30 billion (US$930 million) next year, Ho said.

The new method for preventing tax evasion, the minister continued, is an advanced system – currently used in the U.S – for checking tax payments, and it will prevent wealthy people from taking advantage of the loopholes in the law to evade paying tax. Speaking from experience that he gained while in the U.S., Ho noted that, for every $100 dollars paid in tax, $17 is lost due to tax evasion. About $5 dollars of this amount can be recovered by adopting an efficient tax inspection system, he said.

COLOMBIAN LEADER HOLDS TO TAX CUTTING AGENDA

Colombia’s President Alvaro Uribe, who was sworn in for an unprecedented second term on Monday, has vowed to continue pursuing the government’s policy of pro-business economic reforms, including cuts in corporate tax and the conclusion of a free trade deal with the U.S. Uribe was elected to a second 4-year term in May with a comfortable 62% of the popular vote. He is Colombia’s first sitting president to be reelected after the country’s constitution was amended to allow him to stand for a second term.

A central plank of Uribe’s economic policy is a cut in corporate tax by 6.5% to 32% by 2009. The official corporate tax rate in Columbia is currently about 38.4%, but temporary exemptions on corporate taxes for firms that reinvest their profits have lowered the actual rate to 28.5%, a move which has led to rising levels of investment. However, a myriad of exemptions has made Colombia’s corporate code increasingly complex, and the new tax bill will reduce complexity by stripping out about 1,200 articles of the tax code to leave only about 200. Under the proposals, all exemptions will be ditched to create a level corporate tax playing field for every company.

However, the tax cut may not secure an easy passage because the government has also proposed changes to value-added tax (VAT) by introducing an additional 10% rate to be levied on most foods to compensate for loss of corporate tax revenues. This a deeply unpopular proposal with some in Congress because it is likely to adversely affect the needy the most – half of Colombia’s population are said to live on less than $3 per day – although the government plans to reimburse VAT paid by the country’s most vulnerable groups. Nonetheless, for the economy at large, it would appear that the government’s more liberal economic polices are bearing fruit as central bank figures showed foreign direct investment hit a record $5.3 billion in 2005.

THE FLAT TAX REVOLUTION IN EASTERN EUROPE

In 1994, Estonia became the first country to institute the flat tax, charging 26% on all personal and corporate income with no deductions allowed. “The economy flourished” as a result, declared The Economist. The Estonian example was followed by the other two Baltic states, Latvia and Lithuania, but remained largely irrelevant and unknown to the world at large, as few people were aware of what was taking place in the region. But on January 1, 2001, Russia joined the Baltic states with an even lower tax rate of only 13% (however, the country’s corporate tax is still very high). This led the world to notice. The tax reform jumpstarted Russia’s economy and tax revenue skyrocketed, doubling within three years.

In 2003, Serbia passed flat tax reform with a new rate of 14%. The next year, Ukraine and Slovakia imposed a flat tax of 13% and 19%, respectively, and Romania’s flat tax – instituted just this January – is 16%. The lowest tax of all, at only 12%, is in Georgia, which was passed by an overwhelming vote of 107 to 11 parliamentarians on December 22, 2004. Several other countries may join the above 9 nations if the next elections lead the opposition to take power. Poland, the most powerful East European country in the EU, is likely to be one. The main opposition, Polish Civic Platform Party, wants a 15% flat tax. Likewise, the Civic Democratic Party, the primary opposition in the Czech Republic, is proposing a 15% flat tax, and even the governing Social Democrats are likely to simplify the tax system (without making it flat).

Former Hungarian Prime Minister Viktor Orban, the leader of the main opposition party FIDESZ-MPP, said Budapest will have “no choice” but to jump on the “flat tax bandwagon” to retain the country’s share of foreign investments that will otherwise flow to flat tax nations. The statement was echoed by Hungary’s finance minister, Tibor Draskovics, a member of the Socialist Party, who is now prepared to examine the possibility of a flat-rate income tax. The governing coalition’s junior partner, the Free Democrats, had already issued which proposed a 30% optional flat tax on income in place of the current system, which has a top marginal rate of 38%. Croatia, Slovenia and even Belorus, which otherwise is very resistant to economic reform, are strongly considering the flat tax, and are likely to adopt it in the coming years. Bulgaria is an especially likely candidate and will probably be the next to adopt the single-rate tax system.

Flat tax proposals have recently spread beyond Eastern Europe, although none of these countries have adopted it. China is known to be examining a tax reform featuring a uniform, single tax rate for all. In Barbados, the President of the Barbados International Business Association, George Gleadall, called for a 12.5% flat rate on both personal and corporate income, indicating that it may even be as low as 7.5%. In past years, the Canadian Alliance, then the largest opposition party in Canada, called for a flat tax (CA merged with the Progressive Conservative Party, and is now known as the Conservative Party). In the U.S., of course, progress has been very slow and nothing is likely to happen in the coming years.

The Flat Tax Revolution in Eastern Europe presents a challenge to Western Europe, as companies are bound to move to neighboring states to avoid paying the near-confiscatory taxation (especially when you combine the income tax with corporate, capital gains and dividend taxes) levied in the “Old Europe” to support the Welfare State system. Furthermore, whereas hiring an employee in the Old Europe more closely resembles a Catholic wedding, where no divorce is possible except in the most extreme cases (and even then, companies face union strikes and negative media attention), in the formerly Communist states, one can hire an employee without the fear of being stuck with someone who’s incompetent, lazy, unqualified or simply obsolete.

Faced with a stark choice of fighting their electorate to force through unpopular reforms or stagnating economy with a constantly outflow of job-creating companies, Western Europe hopes it has found the third way – attacking Eastern Europe and threatening it into raising taxes in line with Old Europe. After the Flat Tax was introduced in Slovakia, German Chancellor Gerhard Schroeder reacted by accusing it of unfair competition for “dumping” tax rates to stimulate domestic economic growth and attract foreign investment. This charge has also been leveled against other East European nations that are moving towards a free market. At other times, Western Europe threatened newly admitted EU nations to end subsidies if taxes will be lowered or flattened, arguing that any country that can afford to lower taxes does not need subsidies. New Europe’s response has been to assert that they are not lowering taxes due to some independent wealth, but rather to stimulate their economies, and more revenue will be collected from lower rates.

Few took seriously a UK Conservative Party study on the Flat Tax, but within months, several governments joined the Tories in considering it. Prime Minister of Spain José Luis Rodríguez Zapatero, elected on the Socialist Party ticket, is now considering this system and his director of the Economic Office, Miguel Sebastián, openly favors a flat tax system. In the past, he co-authored a paper with Manuel Díaz-Mendoza, currently serving as an adviser for the tax system in the Prime Minister’s Economic Bureau, entitled “A Proposed Reform of Tax System in Spain”, proposing a flat 30% tax. Even the ultra-liberal Sweden is considering the flat tax, with the country’s largest newspaper, Dagens Nyheter, calling for the government to scrap the progressive tax in favor of a single rate for all tax payers. Greece has already adopted the flat tax system and it remains only a matter of time before other nations of the Old Europe adopt the system.

ASSET PROTECTION / LEGAL STRUCTURES

INMATES AND DEMAGOGUES

There is an old saying aimed at obviously insane conduct - “The inmates have taken over the asylum.” Nut house occupants were on dramatic display recently when the U.S. Senate Permanent Subcommittee on Investigations held another of its orchestrated anti-offshore hearings. This time the already-presumed-guilty indictment was billed as “Tax Havens and Offshore Abuses”.

The Senate circus with 14 witnesses capped off a yearlong investigation that cost millions of taxpayer dollars, claims to have served 70 subpoenas, reviewed more than 2 million pages of documents and produced a 401 page report written by the left-wing Democrat committee staff of Sen. Carl Levin (D-Michigan), the fanatic leader of the anti-offshore band. (Levin was responsible for some of the worst parts of the PATRIOT Act that destroyed Americans’ privacy and gave government police virtually unchecked power over U.S. financial and banking activity.) This grotesque report even goes so far as to advocate curtailing century old legal rights to create trusts, corporations and other entities to protect assets.

But with all that bogus activity, the mighty Senate subcommittee mountain labored and brought forth only a few mice. Investigators could find only six “case studies” of tax haven “abuses” – and some of those were debatably not abuse, but legal activities. Based on only six cases, the subcommittee chairman, freshman Sen. Norm Coleman (R-Minnesota), and his cohort, Levin made the startling, illogical charge that an alleged $40 to $70 billion in U.S. taxes illegally is being evaded each year by Americans’ use of offshore financial activity. The Senators offered zero proof of such wild numbers, and even IRS Commissioner Mark Everson did not endorse these senatorial fantasies.

Take all this Capitol Hill bilge for what it really is – another calculated attack on middle class and wealthy taxpayers who honestly are trying to reduce their liability and protect their wealth by using legal offshore means. But the politicians’ watchword, especially in an election year, always seems to be, pander to prejudice and attack the rich. Let us suppose for a moment that those fantastic numbers the anti-offshore twins, Coleman and Levin, threw around are accurate. Compare an alleged $40-$70 billion in lost revenues to the U.S. underground economy as a whole. Experts say that now at least 10% the U.S. GDP of $11 trillion is underground and evading nearly $500 billion in taxes each year.

But you will not see Coleman-Levin and co. holding hearings about Joe’s Pizza Joint in Detroit evading taxes. Instead these grandstanding senators smear, for the most part, unseen, law abiding Americans who go offshore for greater asset protection, more financial privacy and more profitable investments. People who are rebelling against police state financial tactics, secret wiretapping and illegal surveillance. They are not drug king pins, money launderers or terrorists – they are good old fashioned Americans trying to survive the destruction of freedom in their cherished homeland.

Coleman-Levin and their IRS buddies want to scare all Americans into believing that going offshore is illegal – when it is fully legal, so long as you report your activities and pay your taxes on all worldwide income. It is legal to create and donate assets to an offshore asset protection trust or family foundation. It is legal to form and operate an international business corporation (IBC). It is legal to invest in offshore mutual and hedge funds, precious metals and real estate. And it is still legal to transfer your cash and assets out of the U.S. into safer havens. And with all that is going wrong in the U.S., you can and should do all, or some, of these things – legally and properly.

Blaming the victims: Senate committee hearing on low-tax jurisdictions fails to address problems with tax code, chooses instead to attack fiscal sovereignty and seeks more power for the IRS.

The Senate Permanent Subcommittee on Investigations held a hearing on “Tax Haven Abuses: The Enablers, The Tools & Secrecy”. Clearly designed to criticize taxpayers who use low-tax jurisdictions for tax-planning purposes, the hearing was entirely one-sided, featuring witnesses who want more power for the IRS and more tax money transferred from the productive sector of the economy to government. Comments issued by experts on international tax policy follow.

MEDICAL TOURISM AGENCIES TAKE OPERATIONS OVERSEAS

Think globalization means little more than call centers in New Delhi? Then you have not seen what happens when seriously large numbers of Americans, who spend more than $570 billion at U.S. hospitals annually, start taking health-care holidays in far cheaper climes. Nor have you seen how much money there is to be made by helping them get there. The overseas stampede for medical services has spawned medical tourism agencies.

We are about to find out. This year alone, upwards of 500,000 Americans are expected to travel overseas to get their bodies fixed, at prices 30% to 80% less than at home. Medical tourism, as the practice is known, is rapidly becoming the top choice for consumers who grapple with hefty medical bills. Adult Americans who are either uninsured or considered “underinsured” number more than 61 million – a figure that is likely to soar in coming years. With places like Costa Rica, the Dominican Republic, India, the Philippines, and Thailand pitching their low-cost care, Americans are expected to help turn global medical tourism into a $40 billion-a-year industry by 2010, according to David Hancock, author of The Complete Medical Tourist.

While disruptive to U.S.-based hospitals and HMOs, the overseas stampede is already spawning a brand-new business opportunity: medical tourism agencies. Not only do these companies act as middlemen between patients and foreign physicians, but they also find hospitals, schedule surgeries, buy airline tickets, reserve hotel rooms, and, yes, even plan sightseeing tours for recovering patients. Most important, they aim to reassure customers that cheap does not equal poor quality. There are no licensing requirements, either in the U.S. or overseas. And thanks to free Internet phone services and online advertising, operating costs are relatively low. “I see the market exploding,” says Ted Mohr, an American who runs the Adventist Hospital in Penang, Malaysia, whose non-national customers now make up more than 30% of the institution’s $32 million annual business (up from less than 5% a decade ago). “American health care is getting too expensive for too many people.”

Free Market Medicine

The problem of health care for the uninsured has been solved. The solution, as usual, lies in free markets. We have not had a free market in health care for many decades. I am actually a part of a small, but growing, movement of doctors who have “opted out” of the third-party payment system and simply charge patients directly. No insurance contracts, no medicare, no medicaid, just direct payment at the time of service, from the person who receives the service.

The results? Throughout June and July of this year, my average charge was $37 per patient. Sounds affordable? Well, get this – that fee includes housecalls, some antibiotics and other medications dispensed, and lab fees. Wait a minute, did that guy just say housecalls? Nobody does housecalls any more! Well, a doctor who employs free market principles can provide the kind of care that a patient wants, including housecalls. The patient is the customer, not the insurance company or the taxpayer.

By not contracting with third parties for payment, I do not have the kind of overhead that is needed to contend with those bureaucrats. Medical Economics magazine pegged the annual overhead for a family physician without obstetrics at roughly $272,000 per year in 2003. Mine is less than 10% of that. A typical FP collects about 60% of his charges. I have collected 101%, due to tips. Yes, patients frequently tip me. I calculated that if I charge $30 for something now, in order to come out the same, I would need to charge $107 if I had the same financial constraints as most doctors. I would have an extra $34 in overhead per patient, raising the fee to $64. Then to collect that $64, I would have to charge $107. I can also offer generally same-day service, flexible hours, and adequate time with patients. I charge by time, so I am not financially pressured to gloss over issues or reschedule for later.

I am not really the first to be doing this. It was the typical practice model decades ago. As far as morality is concerned, the free market approach is supremely ethical. Nobody has money confiscated from them, under threat of deadly force, to pay my fees for somebody else’s health care. That is the way Medicaid and Medicare work. My patients willingly pay me, and for the most part, they seem very grateful for the service they get.

“IDENTITY THEFT” A MISNOMER. “IMPERSONATION” WOULD BE MORE ACCURATE

An internationally renowned security technologist, Bruce Schneier is a frequent lecturer on cryptography, computer security and privacy. He designed the Blowfish encryption algorithm, and has served on the board of directors of the International Association for Cryptologic Research and as an advisory board member for the Electronic Privacy Information Center. His latest book, Beyond Fear: Thinking Sensibly About Security in an Uncertain World, covers personal safety, crime, corporate security and national security. His book Secrets & Lies: Digital Security in a Networked World sold more than 80,000 copies, and Applied Cryptography sold more than 150,000 copies and is translated in five different languages.

“Identity theft” does not make sense as a term, he claims. “Your identity is the only thing about you that cannot be stolen. The real crime is fraud due to impersonation. Even worse, by calling it ‘identity theft,’ we naturally focus on the wrong solution – making personal information harder to steal. We need to make personal information less valuable, harder to use. By calling the crime what it really is, it’s more obvious where the solutions lie.”

How should we go about doing that? “It’s simply too easy to use identity information to commit fraud. Someone shouldn’t be able to complete a form in a magazine and open a credit card in my name. Someone shouldn’t be able to guess my password and make large monetary transfers in my name. Financial services needs to slow down and take security more seriously. Europe is a good model here – identity theft is less of a problem because it’s harder to use personal information to commit fraud. Of course, banks and credit card companies are going to oppose any limits on their business. They like the fact that it’s trivially easy to get a credit card. But they’re not bearing the full costs of identity theft. … Until banks bear the costs of losses, they’re not going to fix the problems. It’s basic economics.”

“The Europeans have comprehensive data protection laws. Information collected for one purpose can only be used for that purpose. It cannot be used for other purposes without going back to the individual and asking permission. That kind of personal privacy regime will make it very hard to sell personally identifying information. Businesses won’t like it, though, so it’s unlikely to happen in the United States. Of course, personal information is also easy to steal. So making the information illegal to sell is only part of the solution – we need to also make organizations responsible for the security of the data they’re entrusted with.”

HIDE AND SEEK

The sun-soaked islands that have been the traditional refuge of reluctant taxpayers have not lost their physical charm. However the promise of secrecy as a special attraction of offshore centers is being eroded by a clampdown on money laundering and an international onslaught on tax evasion. Would-be evaders might be advised to give careful scrutiny to a recent report by the OECD that charts significant progress in its effort to improve global transparency in tax matters.

Only two countries, Guatemala and Nauru, have no mechanism for exchanging tax information. All the other countries surveyed are now part of a web of conventions, agreements and treaties. Some only involve the exchange of information with one or two other countries. Some, such as Panama, require the tax offence to be connected to another offence, such as drug trafficking. Overall, however, there has been a marked improvement in the transparency of tax regimes, as countries have introduced rules concerning due diligence on customers, information-gathering powers and the immobilisation of bearer shares, according to the report, Tax Co-operation: Towards a Level Playing Field.

The efforts, albeit incomplete, of the small offshore centers to comply with the demands of the large, industrialized countries have had a possibly unintended impact – the practices of the industrialized countries themselves have been put under the spotlight. Richard Hay, co-chairman of the international committee of the Society of Trust and Estate Practitioners, a professional body, notes the disparity between what OECD countries – in particular the U.S. – practice and what they preach. He says it is unfair that the offshore centers are subjected to more onerous demands than some onshore centers, such as Delaware in the U.S. “If illicit companies with secret ownership merely migrate out of the tax havens and into the U.S., what is the point of the OECD project?”

The OECD is still far from achieving its goal of stopping tax dodgers simply migrating from countries that engage in effective exchange of information to those that do not. Some important financial centers, such as Singapore and Hong Kong, are not participants in the OECD’s initiative. Nor are Austria, Belgium, Luxembourg and Switzerland, all of whom have bank secrecy laws that prohibit exchange of banking information. There are still places where money can be hidden many of which do not conform with the conventional image of an offshore tax haven. Nonetheless, it has been made harder.

PRIVACY

CAR INSURANCE BY MILEAGE IDEA BRINGS UP PRIVACY CONCERNS

Pay-as-you-drive automobile insurance, a concept permitting motorists to buy coverage on a per-mile basis, is attracting attention as one answer to soaring gasoline prices and worsening traffic gridlock. With pay-as-you-drive, insurance factors such as driving history, vehicle type and geographic location are incorporated into the per-mile price, which generally ranges between 2 and 10 cents. Mileage readings are captured through sensors in cars or authorized odometer readings.

Advocates say that if people could save money by reducing miles driven, instead of paying a lump sum annual or semiannual premium, they would take fewer trips or be more likely to use other forms of transportation. Studies have estimated the concept could reduce overall driving by about 10%. “It’s almost a no-brainer when you look at reducing gasoline use and conserving oil,” said Dean Baker, director of the Center for Economic and Policy Research, a Washington think tank. A 2002 Georgia Institute of Technology study found that 27 of 43 states surveyed would be legally permitted to offer pay-as-you-drive insurance. In the other states, such as New York, it found that laws would need to be changed. But the insurance industry has been largely skeptical. In 2001, Texas passed the first law to formally allow insurers to offer pay-as-you-drive insurance, but no companies have responded.

If the idea is to become widespread, advocates acknowledge they will have to assuage privacy concerns about the Global Positioning System (GPS) devices that are often used to record mileage under pay-as-you-drive. Some privacy groups fear that if an insurance company keeps records of drivers’ whereabouts, the firm could be forced to yield that information if it is subpoenaed in a lawsuit. But some technologies do not capture driving locations. One is TripSensor, a matchbox-size device offered by Progressive Insurance that is being tested in a pilot program in Minnesota. Installed under the dashboard, TripSensor records information about when, how far and how fast a car is driven, along with information about acceleration and braking. Customers upload the driving data to the company’s Web site so premiums can be calculated.

HACKERS CLONE E-PASSPORTS

A German computer security consultant has shown that he can clone the electronic passports that the U.S. and other countries are beginning to distribute this year. The controversial e-passports contain radio frequency ID, or RFID, chips that the U.S. State Department and others say will help thwart document forgery. But Lukas Grunwald, a security consultant with DN-Systems in Germany and an RFID expert, says the data in the chips is easy to copy. “The whole passport design is totally brain damaged,” Grunwald says. “From my point of view all of these RFID passports are a huge waste of money. They’re not increasing security at all.”

The United States has led the charge for global e-passports because authorities say the chip, which is digitally signed by the issuing country, will help them distinguish between official documents and forged ones. The U.S. plans to begin issuing e-passports to U.S. citizens beginning in October. Germany has already started issuing the documents. Although countries have talked about encrypting data that is stored on passport chips, this would require that a complicated infrastructure be built first, so currently the data is not encrypted. “And of course if you can read the data, you can clone the data and put it in a new tag,” Grunwald says. The cloning news is confirmation for many e-passport critics that RFID chips will not make the documents more secure.

“Either this guy is incredible or this technology is unbelievably stupid,” says Gus Hosein, a visiting fellow in information systems at the London School of Economics and Political Science and senior fellow at Privacy International, a U.K.-based group that opposes the use of RFID chips in passports. “I think it’s a combination of the two. Is this what the best and the brightest of the world could come up with? Or is this what happens when you do policy laundering and you get a bunch of bureaucrats making decisions about technologies they don’t understand?”

Grunwald says it took him only two weeks to figure out how to clone the passport chip. Most of that time he spent reading the standards for e-passports that are posted on a website for the International Civil Aviation Organization, a UN body that developed the standard. He tested the attack on a new EU German passport, but the method would work on any country’s e-passport, since all of them will be adhering to the same ICAO standard.

In a demonstration for Wired News, Grunwald created a blank document that looks, to electronic passport readers, like the original passport. The demonstration means a terrorist whose name is on a watch list could carry a passport with his real name and photo printed on the pages, but with an RFID chip that contains different information cloned from someone else’s passport. Any border-screening computers that rely on the electronic information – instead of what is printed on the passport – would wind up checking the wrong name. Grunwald acknowledges, however, that such a plot could be easily thwarted by a screener who physically examines the passport to make sure the name and picture printed on it match the data read from the chip. Machine-readable OCR text printed at the bottom of the passport would also fail to match the RFID data. There are other countries, however, that are considering taking human inspectors out of the loop. Australia, for one, has talked about using automated passport inspection for selected groups of travelers.

In addition to the danger of counterfeiting, Grunwald says that the ability to tamper with e-passports opens up the possibility that someone could write corrupt data to the passport RFID tag that would crash an unprepared inspection system, or even introduce malicious code into the backend border-screening computers. This would work, however, only if the backend system suffers from the kind of built-in software vulnerabilities that have made other systems so receptive to viruses and Trojan-horse attacks. “I want to say to people that if you’re using RFID passports, then please make it secure,” Grunwald says. “This is in your own interest and it’s also in my interest. If you think about cyberterrorists and nasty, black-hat type of guys, it’s a high risk.” Hosein agrees. “Is this going to be the massive flaw that makes the whole house of cards fall apart? Probably not. But I’m not entirely sure how confident we should feel about these new passports.”

VIDEO CAMERAS ON THE LOOKOUT FOR TERRORISTS

It sounds like something out of science fiction. Researchers at General Electric’s sprawling research center, are creating new “smart video surveillance” systems that can detect explosives by recognizing the electromagnetic waves given off by objects, even under clothing. Scientist Peter Tu and his team are also developing programs that can recognize faces, pinpoint distress in a crowd by honing in on erratic body movements and synthesize the views of several cameras into one bird’s eye view, as part of a growing effort to thwart terrorism. “We’re definitely on the cutting edge,” said Tu, 39. “If you want to reduce risk, video is the way to do it. The threat is always evolving, so our video is always evolving.”

The United States and its allies now face a new “Iraq generation” of terrorists who have learned how to make explosive devices, assassinate leaders and carry out other mayhem since the U.S. invasion of the country more than three years ago, said Roger Cressey, a former counterterrorism official in the Bush Administration who now runs his own consulting business in Arlington, Virginia. “These people are far more adept and capable in many respects than al-Qaeda before 9-11,” he said. “They don’t appear in any no-fly list or terrorism data base.” The country has to find the best ways to protect itself and that includes investing in new technologies for things like ports, airports and mass transit systems, he said.

At GE, researchers are working on software that allows cameras to separately track people and the items they are carrying to help detect when suspicious packages are left in airports, stadiums and other public places. Cressey said there are about 30 million video surveillance cameras in the U.S. shooting about four billion hours of footage every week. Relying more on computers to go through that footage would allow manpower to be better used elsewhere and perhaps lead to faster recognition of possible threats.

Still, many officials warn that technology cannot replace humans entirely. “You can’t get too reliant on these things,” said state Sen. Michael Balboni, a Long Island Republican and chairman of the Senate’s committee that oversees homeland security issues. “If someone finds a way to bypass them, they can use the technology against us. You have to expect that enemies will find ways to get around it.”

LAW

APPEALS COURT BACKS TERMINALLY ILL PATIENTS’ RIGHT TO ACCESS EXPERIMENTAL DRUGS

Terminally ill patients seeking access to experimental, unapproved drugs won a legal reprieve yesterday in a federal appeals court. A three-judge panel reinstated a lawsuit filed on behalf of the patients and returned the case to district court, which had dismissed the case in 2004. The Abigail Alliance for Better Access to Developmental Drugs and the Washington Legal Foundation sued the Food and Drug Administration in 2003, seeking access for terminally ill patients to drugs that have undergone preliminary safety testing in as few as 20 people but that have yet to be approved. FDA approval of drugs generally requires extensive testing that can involve thousands of patients.

“Barring a terminally ill patient from the use of a potentially lifesaving treatment impinges on this right of self-preservation,” Judge Judith W. Rogers wrote in the 2-to-1 opinion from the panel of the U.S. Court of Appeals for the District of Columbia Circuit. Paul Kamenar, senior executive counsel for the Washington Legal Foundation, called the ruling a big defeat for the FDA. “The FDA has long prohibited lifesaving medicines for terminally ill patients,” he said. “We think this is a tremendous victory for patient groups and those who are in need of these kinds of medicines.” The FDA said it was studying the opinion and would consult with the Department of Justice on its next steps.

Donald Kennedy, a former FDA commissioner, called the lawsuit “Laetrile redux”. In the late 1970s, terminally ill cancer patients and their spouses sought access to Laetrile, a then- and still-unapproved drug, eventually suing the FDA – and Kennedy – in a case that landed in the Supreme Court. In 1979, the court ruled unanimously that there should be no exemption to the FDA’s safety and effectiveness standards, which all drugs must meet, for medicines sought by terminally ill patients. The U.S. District Court had dismissed the Abigail Alliance lawsuit in 2004, and the groups appealed shortly thereafter. The latest opinion revives their case, but also means that years more of litigation are likely. The FDA can ask for the full appeals court to rehear the case. Otherwise, it returns to the lower court.

Judge Thomas B. Griffith, in a dissenting opinion, said the cases raise “a number of vexing questions,” including whether patients could access any drug, including marijuana, that they and their doctors believe is potentially lifesaving. “The decision is the patient’s decision, in consultation with their doctor, knowing at the time the known risks and benefits,” said Frank Burroughs, president of the Abigail Alliance, who founded the group after his daughter, Abigail, died of cancer in 2001.

REAL CRIME, FAKE JUSTICE IN BRITAIN

For the last 40 years, government policy in Britain, de facto if not always de jure, has been to render the British population virtually defenseless against criminals and criminality. Almost alone of British government policies, this one has been supremely effective. No Briton nowadays goes many hours without wondering how to avoid being victimized by a criminal intent on theft, burglary, or violence.

An unholy alliance between politicians and bureaucrats who want to keep prison costs to a minimum, and liberal intellectuals who pretend to see in crime a natural and understandable response to social injustice, which it would be a further injustice to punish, has engendered a prolonged and so far unfinished experiment in leniency that has debased the quality of life of millions of people, especially the poor. Every day in our newspapers we read of the absurd and dangerous leniency of the criminal-justice system.

None of the revelations, however, would have surprised a man called David Fraser, who has just published a book entitled A Land Fit for Criminals – the land in question being Great Britain, of course. Far from being mistakes – for mistakes repeated so often cease to be mere mistakes – all these occurrences are in full compliance with general policy in Britain with regard to crime and criminality. Fraser was a probation officer for more than a quarter of a century. He began to doubt the value of his work in terms of preventing crime and therefore protecting the public, but he at first assumed that he was missing the bigger picture. He assumed also that those in charge not only knew what they were doing but had the public interest at heart.

Eventually, however, the penny dropped. Fraser’s lack of success in effecting any change in the criminals under his supervision, and thus in reducing the number of crimes that they subsequently committed, to the great misery of the general public, was not his failure alone but was general throughout the system. Even worse, he discovered that the bureaucrats who ran the system, and their political masters, did not care about this failure, at least from the point of view of its impact on public safety. Careerist to the core, they were only concerned that the public should not become aware of the catastrophe.

The collective intellectual dishonesty of those who worked in the system so outraged Fraser – and the Kafkaesque world in which he found himself, where nothing was called by its real name and language tended more to conceal meaning than to convey it, so exasperated him – that, though not a man apt to obtrude upon the public, he determined to write a book. It is clear from the very first page that he wrote it from a burning need to expose and exorcise the lies and evasions with which he lived for so long, lies and evasions that helped in a few decades transform a law-abiding country with a reputation for civility into the country with the highest crime rate in the Western world, with an ever-present undercurrent of violence in daily life. As events unfolded, his book has had a publishing history that is additionally revealing of the state of Britain today.

By example after example, Fraser demonstrates the unscrupulous lengths to which both bureaucrats and governments have gone to disguise from the public the effect of their policies and decisions, carried out with an almost sadistic indifference to the welfare of common people. He shows that liberal intellectuals and their bureaucratic allies have left no stone unturned to ensure that the law-abiding should be left as defenseless as possible against the predations of criminals, from the emasculation of the police to the devising of punishments that do not punish and the propagation of sophistry by experts to mislead and confuse the public about what is happening in society.

Relentless for hundreds of pages, Fraser provides examples of how the British government and its bloated and totally ineffectual bureaucratic apparatus, through moral and intellectual frivolity as well as plain incompetence, has failed in its elementary and sole inescapable duty – to protect the lives and property of the citizenry. According to Fraser, at the heart of the British idiocy is the condescending and totally unrealistic idea – which, however, provides employment opportunities for armies of apparatchiks, as well as being psychologically gratifying – that burglars, thieves, and robbers are not conscious malefactors who calculate their chances of getting away with it, but people in the grip of something rather like a mental disease, whose thoughts, feelings, and decision-making processes need to be restructured. All in all, Fraser’s book is a searing and unanswerable (or at least so far unanswered) indictment of the British criminal-justice system, and therefore of the British state.

You might have thought that any publisher would gratefully accept a book so urgent in its message, so transparently the product of a burning need to communicate obvious but uncomfortable truths of such public interest, conveyed in such a way that anyone of reasonable intelligence might understand them. So uncongenial was Fraser’s message to all right-thinking Britons that 60 publishers to whom he sent the book turned it down. In a country that publishes more than 10,000 books monthly, not many of which are imperishable masterpieces, there was no room for it or for what it said, though it would take no great acumen to see its commercial possibilities in a country crowded with crime victims. So great was the pressure of the orthodoxy now weighing on the minds of the British intelligentsia that Fraser might as well have gone to Mecca and said that there is no God and that Mohammed was not His prophet. He was the victim of British publishing’s equivalent of Mafia omerta.

Fortunately, he did not give up, as he sometimes thought of doing. The 61st publisher to whom he sent the book accepted it. I mean no disrespect to her judgment when I say that it was her personal situation that distinguished her from her fellow publishers. Her husband’s son by a previous marriage had not long before been murdered in the street, stabbed by a drug-dealing Jamaican immigrant, aged 20, who had not been deported despite his criminal record. A Land Fit for Criminals has sold well and has been very widely discussed, though not by the most important liberal newspapers, which would find the whole subject in bad taste. But the book’s publishing history demonstrates how close we have come to an almost totalitarian uniformity of the sayable, imposed informally by right-thinking people in the name of humanity, but in utter disregard for the truth and the reality of their fellow citizens’ lives. Better that they, the right-thinking, should feel pleased with their own rectitude and broadmindedness, than that millions should be freed of their fear of robbery and violence. Too bad Fraser’s voice had to be heard over someone’s dead body.

OPINION & ANALYSIS

CONSERVATION OF PARODY

Bush, Rice, Twerps and Children in Power

I am wondering. Help me wonder. Either Georgie Bush is the minor, depressing, witless ferret I think he is, or I am. It has to be one or the other. If things do not start looking up pretty soon internationally, I am going to be pretty sure which.

As best as I can tell, what the Maximum Cipher lacks, among an inexhaustible list of other things, is a hop-toad’s understanding of how people work. Here we have the explanation of just about everything he does. He is dealing with a world full of people, but has no idea what people are. He does not take their predictable behavior into account. Think about it. When he went braying into Iraq like a learning-disabled jackass, he thought people would roll over, throw flowers, and have a democratic revolution. This would start a domino effect that would make all the other Moslem countries want to be democracies too. They would climb over each other to be democracies. They would love us because democracies love each other. He just knew it. This makes perfect sense if you have no freaking idea how human beings work.

Of course, if you have read any history, which Bush has not, you will have noticed that people do not like being occupied by force. They do not like having their cities bombed. It galls them. It can, under certain circumstances (such as any circumstances) make them hostile. Then you might be real surprised when their gratitude was so meager after you remorselessly wrecked their cities, killed their army (which consisted of other people’s husbands, brothers, and sons – ever think of that?), groped their women when you did not have time to rape them, and left them without water and electricity. I am not saying the Iraqis ought to dislike these things, only that pretty reliably they will dislike them. The Afghans too, or either. It is how people are. Ungrateful. Bush has no idea how people are.

The world is just waiting for us to bring it our favorite abstractions. They hate us for our freedoms, and yearn to be bombed into having them. People do not work that way. Bush does not know it.

Remember when Baffled Boy wanted all the Moslem countries to have elections and be democracies? And was all surprised when it worked, and he got Hamas and all? Let us ponder this. The analysis will be difficult, but I have faith in my readers. What happens when you have elections in a country in which most of the people hate you? We will do this by multiple choice, to give everyone an even chance. Answer: they elect a government that (a) loves you, loves Israel, and wants desperately to do everything you tell it to, or (b) hates your guts. If you went for (a), you are a Republican and have no idea how people actually work. And you probably listen to ooom-pa music. Let us suppose that you do not like Bush. If the Chinese bombed your home, and killed your sister, would that make you join the Chinese and want a puppet government? It is not how people work.

It is breathtaking. He has occupied and made rubble of two Moslem countries, and heavily supports Israel, hated by all Moslem countries, in turning Lebanon, a third Moslem country into rubble, and is threatening Syria and Iran, two more Moslem countries, with attack, possibly nuclear. By doing this he is going to inspire Moslems with a passion for American democracy, change the Mid-East into Fifth Century Athens, and make them love us. God Almighty, what a fool. What a bus-station clown. It is not how people work.

The same fertile stupidity shows in his relations with Latin America. The first thing to recognize about the world below Laredo is that the countries there deeply, deeply resent American meddling. Whether you think the resentment justified, or the meddling for that matter, is irrelevant. Rule One of diplomacy here is, “Do not get into Latin faces unless you really need to.” So what does Befuddlement do? Some Cuban officials came to Mexico City and checked into a Sheraton. He had the Sheraton eject them. It was utterly childish, and utterly pointless (you think there might be another hotel in Mexico City?) and infuriated Mexico. People are still angry. And sympathetic to Cuba. He has no faint idea of how people work. The man is an idiot.