W.I.L. Offshore News Digest for Week of May 19, 2008

CREATE YOUR OWN TROPICAL PARADISE

David Schnittlich dreamed of retiring to the Caribbean. So he bought his favorite restaurant there and became Mango Dave.

This is a great story, courtesy of Forbes, of a man who pursued the proverbial fantasy of moving to a tropical island. Although not without its downsides, like hurricanes and a higher cost of living, it has been worth it -- so declares "Mango Dave".

David Schnittlich spends most of his nights mingling with customers at Mango's Seaside Grill, the open-air beachside restaurant he owns in Anguilla. The 65-year-old New Jersey native is one of those rare people who lives out a lifelong dream. Schnittlich says since moving to the island 13 years ago, he has also shed 50 pounds and overcome diabetes, gout and stress. "I'm sure I'll live longer," he says.

While tens of thousands of Americans with warm-weather fantasies migrate to Florida and Arizona every year, a number opt for exotic destinations. Like Schnittlich, many buy businesses for fun and profit once they arrive and are glad they did. Except that it is not all fun. Along the way, Schnittlich has lived through traumatic changes to his personal life, severed decades-long financial ties and weathered the worst Mother Nature could throw at him.

The Northeasterner was drawn to Anguilla by the idyllic tropical scenery, English-speaking population, safety and laid-back atmosphere. The 16-by-3-mile British Overseas Territory is home to 12,000 people and an intimate getaway for the rich and famous. Its airport's only direct flights are to other Caribbean islands, and no cruise ships make port calls. Most visitors either fly in with their own planes or take a 20-minute ferry ride from nearby St. Martin.

Despite, or because of, its difficulty of access, Anguilla has more than its share of the Caribbean's 5-star resorts ... It also has pristine beaches and gourmet restaurants. Several resorts are under construction, but the island remains largely undeveloped. The only traffic jams are caused by wandering goats.

Schnittlich saw Anguilla featured in 1989 on TV's Lifestyles of the Rich and Famous. [Ah yes ... the '80s] The following day he booked a trip with his wife, Carol. Five years and several visits later Schnittlich liquidated Philmour's, an upscale clothing store in northern New Jersey that his father had opened in 1947, and spent a month traveling the Caribbean while considering a move there

One evening he was sitting in Mango's, his favorite Anguillan restaurant, when the chef mentioned he was trying to sell the place and move to the U.S. so he could be near his daughter while she attended school. "I realized it was the opportunity of a lifetime," Schnittlich says. "I couldn't just retire and live down here. I needed something to do."

The next day Schnittlich handed the owner a nonrefundable deposit for $50,000, 20% of the asking price. They sealed the deal with a handshake. Then came the hard part. After returning to New Jersey, Schnittlich took three weeks to summon the courage to tell his wife about his decision to become an Anguillan restaurateur. "She laughed, but not for long," he recalls. "She thought it was a stupid idea and said I was going through male menopause. She told me to get therapy."

Undeterred, Schnittlich arranged for the previous owner to run Mango's for three months so he could sell off most of his U.S. assets. Schnittlich sold his 4-bedroom home in East Hampton, cars and several rental properties in the Hamptons. He kept one for home visits. Schnittlich's partner bought his 50% stake in Goldberg's, a 14-store New Jersey bagel chain.

In late June 1995 Schnittlich paid the balance of the restaurant tab. His $250,000 bought him a wobbly structure with 13 dining tables and cooking gear. Its best asset was the name Mango's Seaside Grill, one of Anguilla's best-known eateries. Schnittlich sank another $75,000 into new furniture, lighting and flooring.

Eleven days shy of Mango's scheduled reopening, he was in the U.S. on personal business on September 5, 1995, when he heard that a giant storm was barreling down on the Leeward Islands. Hurricane Louis was a Category Five monster with 180 mph winds and 25-foot waves. Two days later Schnittlich chartered a small plane to Anguilla. Mango's was in ruins. "The only thing left was the toilet," says Schnittlich, who cried for hours on the beach. It took the island weeks to restore water, power and phone service.

He still chokes up at the memory, but Schnittlich now sees the experience as a blessing in disguise. He had had the foresight to buy property insurance, and he used it to build a more modern Mango's, with 36 tables. Schnittlich also expanded his menu and his wine list, from 24 to 550 vintages. Reopened in January 1996, the restaurant quickly recaptured its buzz.

Five years into their Anguillan adventure, Schnittlich's wife of 22 years returned to the U.S. and later filed for divorce."My dream came true, but it became her nightmare," he recalls. Tough as the breakup was, Schnittlich says it did not make sense for either his wife or him to remain perpetually unhappy. Today he is in love with running a restaurant that draws glitterati like Robert De Niro, Al Gore and the Clintons ...

Although Schnittlich had acted quickly when he heard Mango's was on the market, it had two ingredients his business experience told him were key: an established clientele and a solid reputation. Nor did it hurt that expenses are reasonable. Schnittlich, who owns his building, pays $78,000 annually for the beachfront acre on which it sits, plus $13,000 for insurance.

Schnittlich's biggest headache is labor. When some employees called in sick early on, he got stuck serving meals and clearing tables himself. [Sounds like managing a restaurant all right.] These days he pads his shifts with 20% extra workers to avoid having to pitch in. He has also managed to lure and keep a talented chef who graduated from the Johnson & Wales' College of Culinary Arts in Providence, Rhode Island, by offering him 20% of the restaurant.

More than anything, Schnittlich attributes Mango's success to keeping things local. "If we don't catch it, we don't serve it," he says. That may be true of the fish, but he still has to import wine, dry goods and meat from Miami. Mango's revenues have increased from $350,000 to $1.5 million a year under Schnittlich, and it is solidly profitable. He closes the business and visits the U.S. between July and September -- hurricane season.

Schnittlich is still a U.S. citizen, which means that, even though Anguilla has no income tax, he is on the hook to Uncle Sam. That includes paying the U.S. self-employment tax -- 15.3% on his first $102,000 and 2.9% above that.

There are some tax benefits for Americans living overseas. Nonresidents get to exclude up to $87,600 of income earned outside of the U.S., if they spend at least 330 days every 12 months abroad. Schnittlich does not qualify.

"Islands are nice, but the cost of living may be higher than you expect," warns Leonard Levin, head of the international tax practice at New York City accounting firm Weiser LLP. "Do your homework," he says, "before you go."

Mere details in the greater scheme of things, insists Schnittlich, who is now known locally as Mango Dave. "I'm a better person now than I used to be, inside and outside," he says. "I used to work 20 hours a day running multiple businesses in New Jersey. Now I only work 4 hours a day."

CHINA’S SIMPLE SOLUTION

China has two problems. They need to become less dependent on exports for economic growth, which means encouraging the population to raise their spending beyond the current 50% (!) of income and save less. The other is to curb their domestic inflation rate, concomitant with a boom that has "unsustainable" written all over it. Peter Schiff, author of Crash Proof: How to Profit from the Coming Economic Collapse, suggests an readily available and surely logical palliative: revaluing the Chinese Yuan. As the typically wry Schiff puts it: "It is a simple solution that only an economist can miss."

Revaluing the Yuan would lower import prices, encouraging consumption, and lower export profit margins, encouraging producers to substitute away from servicing the export market. And once the Chinese central bank allowed the Yuan to float, it would no longer have to create so many Yuan to soak up the dollars needed to support a fixed exchange rate, thus lowering the inflation rate.

This is what the U.S. has been demanding for years now, in a typically misguided effort to help domestic U.S. producers against import competition. An appreciating Yuan may temporarily make U.S. production more competitive, but be careful what you wish for ... A lower level of imports for the U.S. will mean higher goods prices for the already reeling U.S. consumer. Behind all the governmental statistical mumbo jumbo, this means lower real incomes and a lower standard of living. (This thesis is explained at length in Schiff's book.)

So will the Chinese central authorities avail themselves of this opportunity? That they have not so far could indicate a fear of perturbing the exisiting order -- a timidity that could easily backfire down the line if they end up later implementing the policy in a crisis atmosphere. Or it could reflect the influence of the Chinese mercantile interests, which are as usual at odds with the rest of the population when it comes to government subsidies and policy-making.

As China grapples with the consequences of its devastating earthquake, it has also begun to finally confront the destabilizing forces bubbling up beneath its economic landscape. This week, several key Chinese officials, typically not known for their candor, conspicuously noted the need to both stimulate domestic consumer spending and bring down roaring inflation. While at first blush these two goals might appear mutually exclusive, China's leaders do have a magic bullet that can hit both targets at once.

A stronger currency, commensurate with China's increased economic strength, will both tamp down inflation and allow Chinese consumers to buy more goods and services. However, for reasons not entirely clear to me, or few others for that matter, China's leaders are resisting this simple and beneficial solution.

The Chinese leadership's stated goal in prodding their citizens to spend more is to decrease their economy's dependence on exports. If the Chinese, who currently save 50% of their incomes, saved less, more of their production would be consumed locally. As a result, China would be less vulnerable to economic downturns abroad. Without a vibrant domestic market, over-leveraged Americans will apparently remain China's most important customers.

A strengthened Yuan would lower the real costs of goods for domestic consumers and allow the Chinese themselves to compete more evenly with consumers in other nations to whom they currently send the fruits of their labor. As goods become more affordable in China, the Chinese will naturally consume more. A rising Yuan would therefore kill two birds with one stone:It would reverse recent consumer price increases and it would induce Chinese consumers to buy their own products.

If the Chinese were to follow such a sensible path, the consequences here in America would be immediate and severe. By allowing their currency to appreciate, Chinese monetary authorities would no longer need to buy and remove as many dollars from the open market, producing an immediate reduction in the demand for U.S. Treasuries, mortgage backed securities and other U.S. dollar denominated debt. The result in America would be a simultaneous increase in both consumer prices and interest rates. Such developments would only compound the problems already rippling through our economy.

To spur domestic spending absent such currency rebalancing, Beijing must instead rely on the nominative, simulative effects of inflation. By further expanding their money supply and allowing those increases to be passed on to workers in the form of higher wages, Chinese consumers will have more Yuan to spend and hence will buy more. However, such a policy will only solve one problem by aggravating the other.

Further, by penalizing savers through the erosive effects of inflation, China would discourage savings and jeopardize one of the true sources of its rising living standards. Contrary to the economic hocus pocus propagated on Wall Street, Washington and at American universities; economies grow not as a result of consumer spending, but as a result of savings. Under consumption is the true source of prosperity as it engenders capital formation, which lies at the root of sustainable economic growth.

Here too the implications for Americans are dire. In effect, by only spending half of their incomes and lending much of the rest to us, Americans have merely been enjoying the current consumption that more frugal Chinese consumers have decided to defer. As the Chinese consume more, Americans will simply be forced to consume less.

Low prices and rich consumers are a potent concoction that is sure to soothe China's roaring economy while raising the living standards of its hard working citizens. It is a simple solution that only an economist can miss.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book Crash Proof: How to Profit from the Coming Economic Collapse.

IRISH FM WARNS AGAINST EU “NO” VOTE

This one falls under the "I don't know whether to laugh or cry" category. The EU wants to get rid of the rule requiring unanimous consent by all EU countries to change the terms of a treaty, in favor of a simple majority. It does not take a Ph.D. to understand that there is a huge difference between the two barriers to change. Clearly if the measure clears, a lot more treaties are going into effect -- and in ways that are hard to foresee now, except it is certain they will encompass domains previous thought to be outside the reach of treaties.

The Irish citizenry -- representing the only country where permission for the change is subject to popular vote -- are being told that they will be "isolationists" and other terrible things like that if they refuse to give up their veto power, and do not meekly accept having to go along with the majority henceforth.

Ireland's finance minister said ... that a rejection of a new EU treaty in an Irish referendum next month would be a step backward for his country's economy. Ireland is the only member of the 27-nation EU to subject the treaty changing the way EU decisions are made to a popular vote. The June 12 poll will also indicate how voters in the country view EU membership.

Dubbed the "Celtic Tiger" as EU funds and American investment spurred economic growth in the 1990s, Ireland has become a model for nations in Eastern Europe that saw EU membership as the path to prosperity. But recent months have brought slowing growth, a sliding housing market and surging prices. A strengthening euro, meanwhile, raises costs for U.S. manufacturers based in Ireland, such as Pfizer Inc. and Intel Corp.

On one hand, low taxes and efficient regulation have boosted the Irish economy mightily. One the other, they were in the middle of a real estate bubble like the U.S. and U.K. But the former had nothing to do with the mania component of the real estate bull market. That was due to the worldwide credit-creation machine run amuck, as was the case everywhere. Sounds like a reason to keep doing what they have been doing with a little more care, not casually subject themselves to greater EU dictation.

The new EU treaty would clear the way for the European Union's executive office to pass more decisions by majority -- rather than unanimous -- vote, and would raise the bloc's profile on the world stage by creating a new post of EU president.

Finance Minister Brian Lenihan said he believed Irish voters would see the advantages of approving the treaty, stressing that there was strong Irish support for European projects such as the euro currency.

"For me, a 'No' vote is a step into isolationism for Ireland," he said. "When people reflect on the current position of the Irish economy, they see how important it is to deepen and strengthen our international position. "A decision by the Irish people not to ratify the treaty ... would send a very clear signal to those who have traded with us in Europe."

Oh no, not isolationism! One would think this term of invective, traditionally thrown against everyone everyone who wants to mind their own business and leave everyone else to sort out their own affairs -- probably going back to Troy -- had lost its power to intimidate, if not its credibility entirely. But no. Irish Finance Minister Lenihan apparently has U.S. necon friends who licensed out the word to him on favorable terms.

As part of the euro-zone, Ireland no longer controls its own interest rates and its economy has not been helped by the European Central Bank's refusal to follow the U.S. Federal Reserve and the Bank of England in slashing borrowing costs to stoke slowing growth.

ECB decisions to keep rates low in recent years risked overheating the Irish economy as house prices bubbled over. A rate cut might benefit two slowing euro nations -- Ireland and Spain -- but could fuel borrowing and push up high inflation across the currency zone.

The article writer is confused here. The ECB refused to follow the Fed interest rate cuts, thus "hurting" the Irish economy. On the other hand, too low rates set by the ECB caused the housing bubble. In either case, it sounds like the ECB has not been an unalloyed blessing to Ireland.

Lenihan insisted that Ireland had a voice in ECB decisions on interest rates -- something that was not possible when Ireland was hitched to the British pound in the 50 years after independence and the country was "entirely at the mercy of what decisions were taken in London."

Lenihan will have to explain why Ireland will have more voice, as such, in ECB decisions after the treaty rule revision than before. It sounds like he is in the pocket of the European power centralizers. He certainly uses the rhetoric of his U.S. counterparts who have been of that philosophical persuasion.

An Irish "no" could halt the EU treaty in its tracks. It would send EU leaders back to the drawing board for a second time after they redrafted an EU constitution rejected by French and Dutch voters in 2005.

In the end, a narrow self-interested consideration of the matter would hinge on whether Ireland got more out of the rest of the EU than it gave. As one of the richer EU countries now, thanks to its low taxes and regulation, one might think they would want to keep the barriers against being robbed as high as possible.

IMF TEAM COMPLETES 2008 ARTICLE IV CONSULTATION DISCUSSIONS WITH JAPAN

The blind leading the blind.

The is a lot wrong with the Japanese economy. The country is one massive socialist welfare state, hobbled by mercantile interests and corruption. But the idea that the IMF will suggest that Japan implement fundamental reforms is ludicrous. The IMF's mission, after all, is to keep the world safe for the ruling financial interests, which never seems to involve fewer regulations, lower government spending, or noninflationary monetary policy -- all those policies which, e.g., elevated Hong Kong from utter devastation to membership among the world's richest economies in a generation.

Sure enough, the IMF recommends ... curtain please ... more taxes. What a surprise.

An IMF team, led by Daiel Citrin, Deputy Director of the Asia and Pacific Department, visited Tokyo between 13th and 22nd May to conduct the Fund's annual Article IV review of the Japanese economy. The team held discussions with senior officials from the government, the Bank of Japan (BoJ), and private sector representatives, on recent economic developments and the policy challenges ahead.

At the conclusion of the visit, the mission issued the following statement:

"The Japanese economy has shown resilience to the slowdown in the United States and global market turmoil. The pace of activity in the first quarter of 2008 was robust, led by strong exports to non-US destinations and household spending, but the momentum is set to slow in line with lower global growth and the deteriorating terms of trade. ...

"On the other hand, on the upside, continued strength of emerging markets could provide additional support to exports. In these circumstances, near-term policies should support the expansion while safeguarding financial stability."

"Monetary policy should remain on hold until concerns over the outlook ease. Also, the BoJ has taken useful steps to expand its communication regarding the outlook and the conduct of policy in its April 'Outlook for Economic Activity and Prices'."

"These efforts should help anchor inflation expectations during this period of more volatile price changes. The BoJ should continue its flexible approach to meeting liquidity needs, which has proved successful in maintaining stability in money markets."

While keeping the ossified economic structure in place.

"Fiscal policy should be guided by the need to reduce the already high debt burden and to address the demands from an aging population."

The IMF statement continued:

"Over the last four years there has been a substantial and greater-than-expected reduction of the primary deficit (excluding social security). The authorities plan to achieve a primary balance by FY2011."

Excluding social security? Given Japan's aging population, that is not saying much.

"But the mission's view is that additional fiscal adjustment is needed to put the public debt ratio firmly on a downward path. With expenditure cuts nearing their limits, fiscal consolidation will require revenue measures, including raising the consumption tax and broadening the income tax base."

Ah, yes. Spending has been cut to the bone, so more taxes are needed. The usual IMF nostrum.

"Financial policies should guard against spillovers from the global market turmoil and risks from a slowing economy. Consistent with the recommendations of the Financial Stability Forum recently endorsed by the G-7, policy priorities are to ensure adequate capital levels and strengthen risk management, particularly for regional banks."

"In addition, further reforms are needed to improve financial intermediation, boost core profitability, and manage the privatization of Japan Post to ensure a level playing field for all institutions."

"The pace of structural reforms has slowed, in part reflecting concerns over widening inequalities."

"However, it is the mission's view that vigorous reforms are precisely what is required to deal with Japan's various medium-term challenges by lifting growth prospects, bolstering the economy's resiliency to shocks, and contributing to global stability."

You can be the "reforms" the IMF has in mind favor the mercantile class over the workers. True reform in Japan would be narrowing inequalities, not widening them as the recent so-called reforms have been apparently doing.

The mission concluded: "The priorities remain to enhance labor market flexibility and promote competition and productivity through further deregulation and market opening."

EU CONSIDERS TOUGHENING OFFENSIVE ON TAX HAVENS

High-tax EU countries, Germany in particular, are using the recent exposure of tax evasion among the clients of a Liechtenstein financial company as leverage to try and crack down still harder on tax havens. Now they want to renegotiate the EU Savings Tax Directive, which took years of initial negotiation to go from idea to law. Those who fought that law tooth and nail have let it be know that they are, indeed, still the opposition.

Under pressure from Germany, the EU [has] agreed to consider a new clampdown on tax havens, despite the opposition of one country, Luxembourg, which said it saw no reason to change the existing law. In what is likely to become a lengthy negotiation, the European Commission will propose the expansion of a directive that aims to ensure that EU citizens do not evade taxes on the interest from savings by opening accounts abroad.

Tax havens have been in the spotlight since February, when Germany cracked down on tax evaders in Liechtenstein. Germany persuaded EU finance ministers to speed a planned review of the savings legislation after revelations of tax evasion. Since then, concern has spread, with the tax authorities in Australia and New Zealand carrying out raids and audits on wealthy residents.

Most recently, ... the authorities in the United States indicted a former banker for UBS, Switzerland's biggest bank, on charges of helping a wealthy American real estate developer evade taxes on $200 million held in bank accounts in Switzerland and Liechtenstein. [See story below.]

Speaking at a meeting of EU finance ministers ... the EU commissioner responsible for taxation, Laszlo Kovacs, said he would propose an extension to the scope of the EU's directive on the taxation of savings, which applied primarily to bank accounts. This could be done by expanding the list of products covered, perhaps to include trusts or foundations, or by applying the law to legal entities rather than just individuals, Kovacs said.

This mile-wide loophole to the EU Savings Tax Directive has always been an obvious one (see this W.I.L. piece from 2004). At some point if the EU succeeds in closing of all the useful escape hatches, one would expect clients of European tax haven companies to say the heck with it, and head off to Singapore or other points non-European.

On Wednesday Germany's finance minister, Peer Steinbrück, highlighted the way in which investment foundations circumvent the current EU savings tax directive, which applies only to individuals. "They are founded to cheat the tax authority," he said.

European countries say they lose billions of euros in revenue because of tax evasion. There are no precise Europe-wide figures, but Germany alone claims it loses as much as €30 billion, or $46.4 billion, a year.

EU finance ministers set a deadline of Sept. 30 for the EC to complete an interim report on how effectively the current rules have been implemented. Kovacs said he would then "present some concrete amendments on how to amend it."

But that will only be the start of a difficult discussion. The current directive took around 14 years of tortuous negotiation before it came into force in 2005. The EU law operates in 42 jurisdictions: the 27 EU nations plus Switzerland, Liechtenstein, San Marino, Monaco and Andorra as well as 10 former British and Dutch colonies. ...

Luxembourg, which has a developed an important financial center and which defends banking secrecy, underlined its opposition. Luxembourg's treasury minister, Luc Frieden, said he saw no loopholes in the current rules. Any changes "would certainly need a lot of time," he added.

Any amendment must be agreed to by all 27 nations. Luxembourg, Austria and Belgium have refused to supply information on savers' accounts to other countries, applying a withholding tax instead. "On the scope we are open to discussion but Austria will always defend its banking secrecy," said Austria's finance minister, Wilhelm Molterer.

GERMANY AND FRANCE URGE EVASION BLACKLIST REVIEW

The OECD "blacklist" -- countries who were deemed uncooperative or insufficiently attentive to the "war" against money laundering and tax evasion -- has gradually been shrinking over time. One by one countries have all agreed to open their books to OECD investigators, institute various due diligence procedures, stop issuing bearer bonds, etc. But it seems some of the promises made to obtain release from the blacklist have not been delivered upon -- so think France and Germany, anyway.

France and Germany want G7 finance ministers to mandate the OECD to revisit its blacklist of tax havens, in an effort to step up the momentum against tax evasion in the wake of Germany's big Liechtenstein tax investigation this year. The initiative, to be discussed at the G7 meeting in Osaka, Japan, on June 13, could result in reinstating laggard countries on to the list of "uncooperative tax havens" run by the OECD, the body co-ordinating global action against such financial centres, a French official said.

The two governments want the OECD to evaluate which countries have followed through on their promises to curb tax evasion, and those that fail the test to be put back on the blacklist, which carries a threat of retaliatory measures. Ministers meeting at an OECD summit in September would then discuss what action to take against recalcitrant tax havens. Some 35 jurisdictions have made such promises, according to the OECD.

The initiative is not aimed directly at Liechtenstein -- which joins Monaco and Andorra as the only countries to remain on the OECD's list -- but is seen as ensuring that the international political pressure against tax secrecy since the launch of Germany's inquiry does not evaporate.

"There are some countries which said they would co-operate and which were then removed from the list, but in practice they have not at all," said the French official.

Paris and Berlin hope a G7 imprimatur would add political weight to the initiative, although they have not yet persuaded the U.S. to sign up to it. The G7 forum is also useful as European countries have complained that Liechtenstein has higher transparency standards towards the U.S. than it does towards E.U. states.

If true, this is certainly ironic.

A spokesman for Peer Steinbrück, German finance minister, said the aim of the G7 initiative was to "form a common political definition (within the G7) of what the problem is" with tax havens. Direct measures against such centers were not planned, he added.

The initiative is part of controversial steps by Germany against tax evasion. Its revelation in February that BND intelligence agency had paid a whistleblower in Liechtenstein €4 million ($6.2 million) for data on more than 600 clients of the territory's LGT bank stirred outrage in Liechtenstein, Switzerland and elsewhere.

Mr. Steinbrück last week confirmed plans to double to 10 years the period in which tax evasion crimes can be pursued by prosecutors. In addition, tough bilateral steps against Liechtenstein floated by Germany in February -- such as punitive levies on wire transfers to the principality -- "remain firmly on the agenda", a finance specialist with the Social Democrats, Mr. Steinbruck's party, told the Financial Times. Sceptics had earlier suggested such proposals were little more than sabre rattling by Berlin.

German prosecutors said ... that the first court cases against alleged tax evaders might be completed by late 2008. About 150 suspects are under investigation. Some €50 million in overdue taxes has been paid by Germans who have since February voluntarily informed authorities they had evaded taxes.

Separately, prosecutors hope an unrelated court case that resumed ... will lead to the release of about 700 data files on clients of the LLB bank in Liechtenstein. The data are allegedly in the possession of the four men on trial for blackmailing the bank into paying about €9 million to prevent the release of the information.

This is a revealing conundrum. Should Germany consider leniency against men who have committed a real crime -- theft and extortion -- in exchange for information that would help them prosecute a "crime against the state" ... tax evasion?

One of the accused has offered to pass on the data in exchange for a milder sentence, a prosecutor said. The trial opened in April but was suspended until yesterday because of legal technicalities. LLB has refused to comment on the case.

EX-BANKER FROM UBS IS INDICTED IN TAX CASE

A U.S. citizen employee of Swiss bank UBS has been charged with helping another U.S. citizen evade taxes on $200 million in income. The indictment also names as a co-conspirator who is a Liechtenstein citizen. The charge is conceptually similar to those made against partners in U.S. accounting firms who were accused of promoting overly-aggressive tax shelters.

Some of the secrets of Switzerland's biggest bank were put on display ... as federal authorities indicted a former UBS banker on charges of helping a wealthy American real estate developer evade taxes. The one-count conspiracy indictment, unsealed in federal court, accuses the former banker, Bradley Birkenfeld, of helping the developer evade taxes on $200 million held in bank accounts in Switzerland and Liechtenstein. The indictment also names as a co-conspirator Mario Staggl, an executive at a trust company in Liechtenstein, a major European tax haven.

An official briefed on the investigation identified the developer as Igor Olenicoff, the billionaire founder of Olen Properties. ... The indictment is part of a widening federal investigation into whether UBS, one of the world's largest money managers for the wealthy, helped certain clients evade taxes, and it suggests that American authorities are stepping up scrutiny of offshore tax transactions. The inquiry focuses on UBS's private bank based in Zurich, which does much of its business through Liechtenstein.

Martin Liechti, a top private banker at UBS, recently was detained briefly by federal authorities in Florida as a material witness in the investigation.

Mr. Birkenfeld, 43, a citizen of the United States, was the director of important clients for UBS in Geneva from 2002 to 2006, and is a partner and chairman at Union Charter, which caters to wealthy investors through offices in Geneva, Dubai and Hong Kong. Mr. Staggl, also 43, is a co-founder of the New Haven Trust Company in Liechtenstein, which specializes in tax planning.

Mr. Birkenfeld made an initial appearance ... in the U.S. District Court for the Southern District of Florida in Fort Lauderdale. Mr. Staggl, who is a citizen of Liechtenstein, remains at large and did not respond to e-mail messages.

According to the indictment, the two men created fictitious trusts and bogus corporations to conceal the ownership and control of offshore assets. They also advised clients to destroy bank records and helped them file false tax returns, the indictment said.

The two men and others made several trips to the U.S. to pitch tax plans that were intended to conceal American bank clients' ownership of accounts in a Swiss bank, the indictment said.

The content of the "fictitious" legal entity charge is unclear. The issue is whether said trusts or corporations fail on form and substance, or substance alone -- in the later case, e.g., being a technical trust with sufficiently compromised and interdependent parties that the I.R.S. would challenge its formal standing. It sounds like the legal entities "created" did not really exist, which would be little short of astounding given the amount of wealth at stake.

The plans enabled UBS to avoid its obligations to disclose certain income information to the I.R.S., the indictment said, while also evading certain American tax requirements. The cornerstone to the defendants' pitch was that Swiss and Liechtenstein bank secrecy was impenetrable, the indictment said. ...

Relying on secrecy alone has always been a bad bet. One must look ahead to when rules or circumstances might change, and ask then what? If your strategy then shows up as pathetically inadequate, you had best have a plan B -- or layer B, like an authentic, legally-conforming structure..

In December, Mr. Olenicoff pleaded guilty to tax evasion and to lying on his tax returns, and agreed to pay back taxes totaling $52 million. Mr. Olenicoff, who was born in Russia and emigrated to the United States decades ago, is on the Forbes 400 list of wealthiest people, with an estimated net worth of $1.7 billion.

The developments come at a difficult time for UBS, which has been hit by hard by the credit crisis. The bank has suffered write-downs of about $38 billion since last summer, leading to the departure of a chief executive, a chairman and other senior managers.

PRIVATE U.K. INVESTORS MOVE MONEY OFFSHORE

As the multinationals migrate from the city, individuals are also finding a haven in low-tax jurisdictions.

This article covers options and benefits available to U.K. individuals from moving a piece of their financial affairs offshore. Unfortunately, many of these benefits are not available to U.S. individuals. A U.K. citizen who expatriates after retiring no longer owes taxes to the U.K. Treasury on his offshore income, thus potentially benefitting if his or her new resident country has lower taxes than the U.K. This is not the case for a U.S. person, where the I.R.S. considers all your income taxable even if you take up residence on Mars.

However, some of the benefits described accrue to anyone who can defer taxation on an investment's income until the investment matures, rather than pay a tax on the income annually. Many annuities fill this bill, although offshore annuities come with their own set of baggage for U.S. persons.

As companies from advertising giant WPP to fund firm Old Mutual warn they may move offshore to cut their tax burden, many individuals are doing the same with their personal finances. The offshore arms of British life insurers have been reporting a surge in business from UK investors, with figures from the Association of British Insurers showing sales of offshore investment bonds alone soaring 61% in three years to £7.9 billion in 2007.

It is not just offshore investment bonds, that have been winning the hearts of UK investors. Offshore deposit accounts are competing with building societies, and you can now even take your pension offshore and benefit from higher tax-free cash, invest in residential property and even avoid buying an annuity.

Beating the taxman is not just a case of putting your money with a brass-plated institution operating from a low-tax jurisdiction. In recent years the Revenue has got tough on offshore accounts, and as long as you remain resident in Britain you will be taxed on income and gains under UK rules. However, there are some products that can offer advantages to people resident in the UK as well as expats.

People considering offshore products usually fall into one of three categories. Expats can get considerable benefits from taking out offshore bonds, savings accounts and pensions.

Then there are the millions of people planning to retire abroad. For them, offshore products can offer benefits if the country they are planning to retire to has a more benign tax regime than the UK because they can defer tax on their gains until they have relocated. For example, Cyprus charges pensioners income tax of just 5%, while Dubai and Portugal both have more attractive regimes than in Britain. Popular destinations such as France and Spain, on the other hand, have complex systems which mean that you need to get specialist advice before you take your money abroad.

The third group is UK residents who have no plans to emigrate. While offshore products are generally of no benefit to this group, there are still some situations where taking your cash offshore can make sense.

Offshore savings accounts regularly offer even UK residents slightly higher rates of return than their domestic counterparts. Isle of Man-based Kaupthing Singer & Friedlander, for example, offers 6.65% gross on its no-notice account, beating the highest-paying UK account, currently Birmingham Midshires' esaver which tops the domestic tables with a rate of 6.5%.

Offshore banks do not offer the same security as those in Britain, though. You are only guaranteed to get £15,000 of your cash back if a bank on the Isle of Man collapses, compared with compensation of £35,000 in the UK. Gibraltar banks are guaranteed up to 90% of £18,000 on deposit, while those based in the Channel Isles have no guarantees.

"Some offshore banks offer slightly higher rates, but you have to take into account the guarantees, and none have a track record of staying at the top of the tables," says Rachel Thrussell at comparison site Moneyfacts.

Income is paid gross, but if you are resident in Britain you must declare it on your tax return annually, meaning there is also little tax benefit. Deferred accounts, however, are particularly useful to people who in the future expect to pay a lower rate of tax than they do at the moment, such as contract workers with irregular income or people approaching retirement.

While interest on regular offshore accounts is taxable along with your other income in the year it is paid, with deferred products interest is paid gross and you can wait until you close your account to receive your income.

For example, a higher-rate taxpayer with £100,000 in an offshore deferred account paying 6.25% a year would earn interest of £83,353 after 10 years, compared with £44,504 in a UK account. If he or she is a basic-rate taxpayer at the time they take the money out they will still be left with £66,682 after paying tax, a saving of £12,118.

Offshore investment bonds can be attractive to expats and those considering moving abroad, provided the tax regime to which they are moving is more benign than Britain's, because they allow you to roll up your gains gross and benefit from the compounding of returns.

UK-based investment bonds, on the other hand, deduct tax on gains of around 20% each year at source, causing a drag on performance when compared with their offshore counterparts.

If you invested £50,000 in an onshore bond, you would have a lump sum of £72,294 after 10 years with growth of 7% a year, according to SG Hambros, a private bank. If you invested the same amount in an offshore bond, however, you would have £72,833 at the end of the term -- an extra £539 because your gains would have rolled up gross. The figures assume that the higher-rate tax is paid in each case, but if you move to a country with lower taxes your gain will be even higher.

You can also take an income of up to 5% a year from a bond -- onshore or offshore -- with no immediate tax to pay. It is added to your gains when you cash in the bond and is then taxed at your highest rate. A higher-rate taxpayer could therefore wait until they have retired to a country with lower taxes -- and would probably be earning less anyway.

Even if you stayed in Britain, there are perks.

A UK investor could benefit from offshore bonds if their investment was generating income rather than growth, according to new research from Fidelity FundsNetwork, a funds supermarket. For investments generating income, such as cash on deposit, corporate bonds and gilts, an offshore bond will return typically 5.5% more over 10 years than the same investments held in an onshore bond. This figure is net of charges and the costs of financial advice, however, both of which tend to be higher for offshore products.

For growth investments such as equities and property, though, the onshore bond performs better, although many advisers prefer to avoid investment bonds altogether and invest directly in unit trusts and open-ended investment companies (Oeics) since the chancellor reduced capital gains tax to 18%.

There are pitfalls and you should get professional advice before migrating your finances. Australia, for example, can levy arbitrary tax charges on some offshore bonds. Spain and France also have complex local laws that can affect your offshore bond.

Offshore pensions are a relatively new concept, which have developed as a result of a major liberalization of rules introduced in April 2006. The introduction of the qualified registered overseas pensions scheme (QROPS) rules has offered emigrating investors desperate to avoid the perceived inflexibilities of the UK retirement savings regime an attractive list of benefits when they move their plans offshore.

These include increased tax-free cash, improved death benefits, no compulsion to buy an annuity and freedom to invest in residential property. These advantages are only available to those retiring abroad or who are already expats.

Last month the Isle of Man introduced new pension rules that allow pension investors access to 30% tax-free cash, rather than the 25% allowed in UK-domiciled schemes. The Isle of Man schemes also allow investment in residential property, and do not require the purchase of an annuity at the age of 75. What is more, if you die before you are 75 while in an income-drawdown scheme, then inheritance tax on the fund in the Isle of Man is just 7.5%, compared with 35% in Britain.

Whether based in the Isle of Man or other jurisdictions, such as Singapore, Hong Kong and the Irish Republic, which all offer extremely liberal tax structures, QROPS schemes only require the provider to report dealings within your fund to the Revenue for five years. After this there are no reporting requirements at all.

QROPS plans can work well for people moving to certain retirement destinations. But as with savings and investment products, taking your pension offshore is not all plain sailing because you always have to take into account local taxes.

Cash in your pension in France, for example, and you will not be allowed any tax-free cash at all, while local income taxes in Spain and Italy can leave pensioners worse off than at home. UK tax rules are complex enough, and attempting to dovetail our domestic regulations with those of foreign countries is a complicated matter. Get it right, though, and you could be laughing all the way to a foreign bank.

When going offshore pays:

• Deferred-interest accounts can delay tax until your marginal rate is lower.
• Offshore bonds can benefit UK investors seeking income through corporate bonds, gilts and cash on deposit.
• Offshore bonds allow you to defer tax on income until you move to a lower-rate jurisdiction.
• Offshore pensions may offer 30% tax-free cash, reduced death duties, freedom to invest in residential property and do not require you to buy an annuity -- if you are planning to emigrate.

How the pension rules work:

• Any UK resident can take out a qualified registered overseas pensions scheme, but they are designed primarily for people who expect to move or retire abroad.
• You can transfer funds accumulated here to an offshore pension.
• New contributions to an offshore pension will get tax relief only if they are based within the European Union. With offshore pensions based in havens such as the Isle of Man, you may get no tax relief.
• To take out an offshore pension, you need to speak to an adviser specialising in offshore pensions. Charges are generally higher, too.

NON-DOM RULE CHANGE CREATES HEADACHE FOR U.K. TAX AUTHORITIES

In the UK government's anxiety to make a showcase example of taxing rich non-domiciles -- hedge fund managers, soccer team owners, etc. -- it promulgated implementing regulations that caught in their net as many as a million residents who have decidedly more mundane income levels and lifestyles. These people may not owe much in the way of new taxes, but they will have to fill out and tender a complicated form proving such. Now an accountant has questioned whether HMRC, the UK equivalent of the IRS, has the capacity to process all that additional paperwork.

The ability of HM Revenue & Customs (HMRC) to cope with the consequences of the new non-domicile legislation in the Budget has been questioned by tax experts at accountanting firm PKF, who argue that the move could cause administrative chaos.

Partner Philip Fisher has pointed out in an open letter to HMRC Acting Chairman Dave Hartnett this week that up to one million people, including temporary economic migrants from the EU, first and second generation immigrants, and city secondees will be affected. They will have to complete forms detailing their worldwide income and/or agree to pay additional tax, which will then have to be collected.

Mr. Fisher explained that: "While media focus has been on super rich non-doms, the Treasury appears to have forgotten the mass of people who will have to make complicated returns for tiny sums of tax."

"With morale and staffing levels at HMRC at an all time low, their capacity to process the paperwork and collect the tax must be in doubt. Unless they drop the plan, the only sensible thing for the Government to do is to impose more generous cash or time limits, otherwise there could be gridlock at HMRC," he concluded.

TAX SHELTERS 2.0

Bad tax ideas, like viruses, tend to mutate and claim new victims.

It has been amazing us for 30 years what people will do to "shelter" income, up to and including dumping their money down the drain for the sake of getting a current deduction. Peter Lynch has ironically noted that people will spend more time figuring out what new refrigerator to buy than they will selecting a stock. That seems to go doubly for tax shelters, where mistakes are far less easy to reverse than a stock purchase.

If you need a reminder that money does not buy happiness, consider the sad case of Henry T. Nicholas III. The billionaire cofounder of Broadcom has made the news lately over a nasty child-custody battle, a stock-options-backdating scandal in which he has been identified as an unindicted potential co-conspirator, allegations of drug use and the indictment of the former manager of his family holding company for hiding cash transactions. Nicholas checked into the Betty Ford Center in April.

One Nicholas nightmare that has gone unnoticed is his fight with the Internal Revenue Service over whether his family can claim $290 million in tax losses from a $6 million investment in junk Asian debt and securities.

The ploy -- which the IRS calls a "distressed asset/debt," or DAD, shelter -- was sold to Nicholas and other tech high rollers in 2001 by Chenery Associates and MyCFO, a financial advice firm backed by Netscape cofounder James H. Clark and venture capitalist John Doerr. Three years later Congress changed the tax code to bar partnerships from being used to transfer foreign losses to U.S. taxpayers. Even though that law does not apply retroactively to Nicholas's 2001 shelters, the IRS sent his family's partnerships notices declaring them illegitimate economic shams. In March the partnerships filed five lawsuits challenging the IRS's denial of their losses and its imposition of penalties

You might think that congressional action, vigorous enforcement and complications like Nicholas's would have killed off DAD and the rest of the tax shelter racket. But that would be to underestimate the tenacity of shelter salesmen and the greed and gullibility of their marks. Instead, like shelters that garnered unwanted attention in the past, DAD has mutated -- in its case into DAT, or the "distressed asset trust," which replaces partnerships with trusts to transfer losses.

In general, expect the IRS to focus the substance of the arrangement rather than the formal legal setup. If the trust here functions like a partnership vis-a-vis risks and payouts to the trust parties, then the IRS can be expected to deem the old law to apply to the new setup.

"Once you find one type of tax shelter and list it [as abusive], you will get a creative accountant, tax lawyer or other type of promotional salesperson tweaking the shelter," says Nathan J. Hochman, head of the Department of Justice's Tax Division.

All this comes on the heels of the government's efforts earlier this decade to squash tax shelters. It indicted lawyers and accountants, extracted $456 million in fines, penalties and restitution from KPMG and squeezed billions in back taxes, interest and penalties from individual shelter users.

KPMG is no longer cold-calling shelter prospects. Yet smaller firms, independent CPAs, lawyers and insurance salesmen continue to flog new -- and old -- shelter mutations to business owners and the successfully self-employed. "After all the enforcement, I'm surprised at the level of tax shelter activity that's still out there," says Ian Comisky, a partner at Blank Rome in Philadelphia who defends taxpayers in civil and criminal cases.

Court records indicate the IRS is investigating whether John E. Rogers, a Chicago partner in law firm Seyfarth Shaw LLP, promoted DAD and later DAT to dozens of investors nationwide. The government asserts in court papers that Rogers's clients claimed $223 million in dubious losses from Brazilian consumer debt in the three years through 2005. Rogers defends the deals as legit and accuses the IRS of harassment. Seyfarth Shaw wrote a 104-page opinion before the 2004 law change saying the shelters would "more likely than not" withstand IRS and judicial scrutiny. The firm declined comment

Jay D. Adkisson, an attorney who has tracked offshore tax schemes for a decade, says that since the IRS crackdown, lawyers and CPAs appear to have become even more central to selling such schemes. "Offshore promoters have become more sophisticated in what they do," he says. "People think, 'If my lawyer showed it to me, it's okay.' But if something involves offshore, get a second opinion."

When it comes to reducing taxes, we agree.

Beware: Sanctions have been ratcheted up for shelter buyers. Congress created a mandatory $100,000 penalty four years ago for any individual who fails to disclose on his tax return that he participated in a transaction that is the same as, or substantially similar to [emphasis added], one the IRS has listed as abusive. A corporation, including one used in an individual's tax shelter, faces a mandatory $200,000 penalty for not disclosing a listed transaction.

Even banned shelters are still being touted. The IRS listed the "abusive Roth IRA" five years ago. In this deal, promoters encourage clients to shelter huge business profits in Roth IRAs, rather than stick to the $5,000 or $6,000 limit for contributions. In February the Justice Department sued two former Grant Thornton partners seeking to enjoin them from promoting the abusive Roth, among other shelters. A lawyer for one defends all the strategies as proper and "used by national accounting firms." But Grant Thornton says it asked both men to leave in 2001 because it disapproved of the shelters.

Meanwhile, the bad idea has spread. The IRS says it is now investigating two dozen promoters of what it believes may be abusive Roth IRAs or similar questionable transactions.

Safety Tips

• Stay onshore.
• Do not pay outsize fees.
• Do not do deals with your own IRA.
• Get a second opinion.
• Be wary of a tax loss bigger than your investment.

Not surprisingly, we think this goes a bit too far, at least with the first "tip". But the basic points about knowing what you are doing and paying attention to substance are certainly well taken.

AMAZON SUES NEW YORK STATE OVER ONLINE SALES TAX LAW

The "sales" taxes imposed by most U.S. states are imposed on the states' residents on all non-exempt purchases, wherever those purchases are made. Collecting the taxes directly from residents on all but the largest purchases (e.g., try registering your automobile without having paid a sales tax on an out-of-state or country purchase) is infeasible; the cost of enforcement exceeds the expected proceeds. So instead retailers -- however numerous, they are still far fewer in number than customers -- are deputized by force to collect the tax at the purchase stage. In theory, out-of-staters do not have to pay the tax, but the process of getting the refund is more trouble than it is worth except for large purchases.

With the rise of mail order catalog and then online retailing, the states of course wanted the merchants to collect a sales tax on any orders placed by their residents. If the business itself has a physical or legal presence in the state, the state can and will compel the business to act as collector. And many merchants not so required also voluntarily comply, so to speak, with the states' request -- but requiring a purely out-of-state business to collect a transaction-based tax would in theory violate the Commerce Clause of the U.S. Constitution.

As there are many commercial interests at stake, this constitutional principle can actually count on well-heeled defenders when it arises. New York state, in the best modern-day tradition of attacks on constitutional law, has passed a law that trickily attempts a backdoor end-around the legal issue.

Amazon.com, one of the largest online retailers, has an program where "affiliates" can solicit sales on Amazon's site, in effect piggybacking on Amazon's good reputation, visibility, and willingness to act as a moderator with some heft in disputes between customers and affiliates. In exchange, Amazon collects a fee. So when a New York-based affiliate solicits via the Amazon.com website, does that create a commercial presence so that all sales by Amazon -- not just those via the affiliates -- to New York residents are thereby taxable? Amazon has instituted a lawsuit in a New York Supreme Court against the law. Undoubtedly any ruling favoring the homestate will be appealed to the U.S. Supreme Court.

A new law requiring out-of-state Internet retailers to collect sales tax on Web purchases made in New York is unconstitutional and should be invalidated, according to a lawsuit filed by Amazon in Manhattan Supreme Court.

The new law violates the commerce clause of the Constitution by imposing tax-collection obligations on out-of-state entities, due process clauses by creating "an irrebuttable presumption of 'solicitation' [that] is overly broad and vague," and equal protection clauses by intentionally targeting Amazon, according to the suit.

If you buy something online, you are largely exempt from state taxes you might incur if you had made the same purchase in an actual store. Technically, you are supposed to report your online purchases and pay taxes on them, but no one really does that.

New York lawmakers last month, however, approved a budget package that includes a bill that would force online stores like Amazon.com to collect sales tax. New York stands to bring in up to $50 million in unpaid taxes.

Amazon is suing the New York State Department of Taxation and Finance (DTF), and wants the court to rule that Amazon is not required to comply with the statute because it is unconstitutional, and is requesting that DTF cover its legal fees.

Amazon has argued that since it does not have a physical presence in New York and many other states, that it should not be required to collect taxes on shipments going to those states. "Amazon has no physical presence in New York," according to the suit. "It does not own, lease, or otherwise occupy any physical property in the state, and none of its employees works or resides in the state."

Amazon said in its suit that affiliates "do not solicit or consummate sales on behalf of Amazon and are not authorized to act as Amazon's agents." They operate independently from Amazon, and should not be considered a brick and mortar extension of the site, the suit said.

The bill gets around that in a rather tricky way, however, by going after Amazon's affiliate program. Affiliates can place links to Amazon on their personal Web pages and collect money if someone clicks on that link and makes an Amazon purchase. Under the law passed by New York, however, if a writer based in Brooklyn has an Amazon affiliate link on his Web site or blog, Amazon must collect sales tax from anyone who makes a purchase through that writer's link since he is based in New York.

Amazon said in its suit that affiliates "do not solicit or consummate sales on behalf of Amazon and are not authorized to act as Amazon's agents." They operate independently from Amazon, and should not be considered a brick and mortar extension of the site, the suit said.

Overstock.com Takes Stand Against New York Sales Tax

Online retailer Overstock.com has reacted even more decisively than Amazon.com -- probably because the cost of defending the principle that way was acceptable in their case -- to New York's Internet tax law (see posting immediately above). They have implemented a policy of refusing all New York-based advertisers until the law is repealed.

"We have no taxable connection to New York that is recognizable under constitutional principles laid down by U.S. Supreme Court decisions," stated Overstock.com's financial vice president, "and we will keep that status, even if it means having to say goodbye to some long time New York business connections."

Whether defending the principle was a purely pecuniary decision or not, one must respectfully note the clarity and decisiveness of the "take it or leave it" choice Overstock.com lays out to the New York politicians.

Online retailer Overstock.com sent out a note ... to some 3,400 New York-based advertisers, stating that as of June 1st, the site will no longer accept their advertising -- at least until the New York State Internet tax that goes into effect on that date is repealed.

"We love New York," said the site's chairman and CEO, Patrick Byrne, "but New York's new tax law required us to choose between New York customers and New York ad businesses. In the end, we chose our customers. The governor and legislature of New York should understand that a tax is a price that a government charges for a service, and when the price of anything is raised, people (including us) buy less of it."

Earlier this month, Amazon sued the State of New York over the new tax, stating that the site "has no physical presence in New York. It does not own, lease, or otherwise occupy any physical property in the state, and none of its employees works or resides in the state."

"We have worked to assure that Overstock.com has as small a tax footprint as possible because of the benefits it provides to our customers," added Overstock's senior VP of finance, David Chidester. "We have no taxable connection to New York that is recognizable under constitutional principles laid down by U.S. Supreme Court decisions, and we will keep that status, even if it means having to say goodbye to some long time New York business connections."

SEC BUSTS (ANOTHER) INTERNET HYIP SCAM

It looks like the high yield investment program scams are never going to stop coming. (We have never heard of one that is legitimate.) They "promise" some monthly return that if extrapolated out 5-10 years would result in the program investors owning title to every asset in the universe.

If something is too good to be true, it usually is not. A fortiori, if something cannot be possible, it is impossible.

The Securities and Exchange Commission obtained an emergency court order freezing the assets of an alleged perpetrator of an internet Ponzi scheme that reaped $72 million from 3,000 investors in the United States and 30 foreign countries ...

From December 2005 until at least November 2007, Gregory McKnight of Swartz Creek, Michigan, and his company, Legisi Holdings LLC, which the SEC said is a shell holding company chartered in Nevis in the West Indies, sold unregistered securities through a website promising to pay as much as 15% interest per month. Nevis is a bank-secrecy haven, the SEC said.

The court order was issued May 5 by the U.S. District Court in Detroit. The amount of assets frozen, though in the millions of dollars, was not specified in the SEC’s complaint.

Of the $72 million he raised from investors, Mr. McKnight invested only about $33 million, while using $27.5 million to pay off earlier investors and $2.2 million to pay for his personal expenses and to make payments to relatives.

The SEC is seeking unspecific civil penalties from Mr. McKnight and his company.

"McKnight lured investors from around the globe into investing by claiming on his website that the Legisi program was legitimate and unlike other scams and high yield investment programs that you see on the Internet," Merri Jo Gillette, regional director of the SEC's Chicago office, said in a press release. "In fact, McKnight's Legisi program was just that, a scam from beginning to end," she said.

Another line of thinking to pursue is this: If someone could actually earn 15% a month, then after two years your assets will be up 28-fold. Now obviously if such a brilliant opportunity existed, it would surely be available only to a select few. Why would you be among the so-favored?

U.S. SENATORS O.K. $1 BILLION TO NAB ONLINE CHILD PORN SWAPPERS

Guess who else they will catch in the net.

Once more in the name of "defending the children," the U.S. government has decided that we all need more monitoring. A law proposed in the U.S. Senate would fund $1 billion worth of research and implementation in an effort to nab online swappers of child pornography. The monitoring techniques sound more like standard gumshoe gruntwork than futuristic NSA stuff: search for keywords such as "children kiddy underage illegal.mpg" (and worse), download the associated files and check out the content, and attempt to trace the source if the content is actually illegal. But only 2% of potential cases have been followed up with in the past, and the additional funding aims to up this percentage.

This sounds intrinsically unobjectionable as far as it goes. First off, we somehow doubt that, say, tripling the resources going into the overall effort will triple the number of cases pursued. The usual layers of bureaucracy will grow around the effort when the amount of money gets serious. More troubling is the prospect that the Recording Industry Association of America and Motion Picture Association of America will see the monitoring network as a golden opportunity to get the government to come down harder on "file sharers" purportedly violating "intellectual property" laws. Just change the keywords a little, to "Amy Winehouse" and "Ironman", e.g., and away you go. Why pay for your own $1 billion effort when you can get the public to subsidize you?

A U.S. Senate panel has unanimously approved a bill that would encourage federal, state, and local police to use and create special software designed to nab child pornography swappers on peer-to-peer file-sharing networks. The Senate Judiciary Committee ... voted to send an amended version of the Combating Child Exploitation Act, chiefly sponsored by Sen. Joe Biden (D-Delaware), to the full slate of politicians for a vote.

All told, the bill would allocate more than $1 billion over the next eight years for a broad array of efforts aimed at tackling Internet crimes against children. It calls for hiring 250 new federal agents at the FBI, the Immigrations and Custom Enforcement Agency, and the U.S. Postal Service dedicated to child exploitation cases; for beefing up personnel, equipment, and educational programs designed to combat Internet crimes against children; and for creating new forensics laboratories if the attorney general deems it necessary to deal with a "backlog" of online child exploitation cases. "We need to give law enforcement the funds and the tools to pull the plug on Internet predators," Biden said in a statement. ...

The bill's passage follows a hearing last month at which Biden and other senators suggested they saw considerable promise in software designed to detect child pornography sources -- specifically a tool called "Operation Fairplay." The so-called "comprehensive computer infrastructure" was developed two years ago ... in the Wyoming Attorney General's Office, where the system is still housed, and is currently being used by online child exploitation investigators nationwide.

The bill ... allocates $2 million for the attorney general to build upon that software by creating a "National Internet Crimes Against Children Data System," which would make information about ongoing cases -- particularly high-priority ones -- accessible to investigators nationwide and coordinate development of new software tools designed to detect alleged child predators in real time.

Through the existing Fairplay system, investigators log onto peer-to-peer file-sharing networks as any other person would and search for files containing certain keywords that are likely to indicate child pornography is involved. Then they download files -- frequently videos, sometimes as long as 20 to 30 minutes, with names like "children kiddy underage illegal.mpg", and much more obscene -- to their own machines. The Fairplay software allows the investigator to obtain the IP address of the file's sender and, in some cases, display its geographic location in map form.

Once armed with an IP address and date and time of the download, investigators can subpoena the Internet service provider for more information, such as name and address of the subscriber who was assigned it at that moment. It is not clear whether any wiretaps are also conducted to monitor ongoing file-swapping.

Through that process, investigators have identified more than 600,000 unique computers allegedly trafficking in child pornography and traced them to the United States. But Biden and others have voiced dismay that they are only equipped with the resources to investigate about 2% of those potential cases.

INTERNET SERVICE PROVIDER CHARTER COMMUNICATIONS TRADES PRIVACY FOR POCKETBOOK

We thought that privacy-violating internet browser "cookies" had largely faded as a threat of substance. Both the force of public opinion and the availability so many cookie-blocking options, including those natively available in all modern browsers, made it hard for us to take any such threat seriously.

But apparently enough users still surf with no privacy protection enabled that ISP Charter Communications has decided it is worth their while to revive the old technique. The plan is to use the noxious cookies to track and analyze customer browsing activities and then force-feed them targeted advertising. Great. We shall see whether enough of Charter's customers object to force them to withdraw the idea, never mind embarrass them into some kind of public recantation.

ISP Charter Communications has cooked up a new scheme to fill the coffers, and are rolling it out with a letter campaign to customers advising that the new policy will be pennies over privacy.

The plan -- which is anything but new -- is to use cookies to track customer activities and force targeted advertising on them. The practice was rampant in the dial-up days of the internet, where secret advertising cookies tracked users and piped in pop-up ads. More recently, the method has been used by legitimate ad networks like DoubleClick, as well as more sinister operations, including spammers and phishers. The difference between Charter's plan and third-party systems like DoubleClick is a matter of scope: While DoubleClick can only track users on sites that use DoubleClick advertising, Charter will be able to track users everywhere -- to the bank, to Social Security, to that "special" website the wife is not supposed to know about -- and use that data just about any way they want to. Ted Schremp, a Charter exec, says the system will not be tracking personal information -- but we are skeptical, since he also admits he has no clue how long gathered information will be kept.

The program is frighteningly similar to the UK-based Phorm, which lit a firestorm that spread as high as the House of Commons when it was revealed that the company partnered with British Telecom to run secret trials of the service. The UK government eventually decided the service would probably be declared illegal unless it was handled on a strict op-in basis. Charter's move is not entirely unlike one taken recently by Earthlink, to begin serving its own ads to customers who try to visit nonexistent domains, a practice that has courted its own share of controversy for its potential for security breaches.

Charter is, predictably, spinning the service as an innocent and innocuous move to provide users with a better experience -- as though being bombarded with advertising flashing brighter than Studio 54 has ever enhanced anyone's browsing -- but we have a feeling they will be surprised once the torch-wielding mob shows up. Even more likely to win them a customer revolt is the opt-out nature of the plan, which uses an opt-out cookie that can only be obtained by entering a full name and address. Because it is cookie-based, the procedure must be performed for every browser on every computer the customer uses, and would have to be repeated anytime the browser's cookies were cleared. We are no Kreskin, but we predict an interesting road ahead.

Going back several generations worth of versions, Internet Explorer, Firefox, and Opera have all allowed you to either block all cookies except those you allow or to accept all cookies except those you block. The settings are found under the privacy preferences/options procedures. You can also use a more sophisticated third party filtering application such as Proxomitron and WebWasher, which contribute many more privacy enhancing services than just blocking unwanted cookies. So there is no excuse for any Charter customer to see an unwanted ad ... which does not excuse Charter's plan.

KEEP YOU SAFE IS A VIRTUAL ONLINE “SAFE-DEPOSIT BOX”

Keep You Safe is an "online safe-deposit box" service that has recently come to our attention. It definitely looks like a potentially useful one. Using your password, any uploads to to your KYS account are automatically encrypted. Only someone who has the password can obtain access to your account and view any documents you have stored there. The free service gives you 2.5MB on online storage space, while the $4/month service gives you 500MB. As the later is paid for using a credit card, the fact that you have a KYS account could be easily discovered or confirmed.

This article is from Linux.com, hence the emphasis is on the open source software behind the Keep You Safe service. Among the open source applications are the numerous custom applications that KYS founder, Eric Wolbrom, and his partner built to encrypt and store clients' data. Fairly amazing in and of itself, this also, not merely coincidentally, makes the whole service more secure -- so Wolbrom believes.

Personal data safety is big business lately. There are a variety of ways to protect your identity or keep your personal information from the prying eyes of dishonest people, but Eric Wolbrom has what he believes is a unique service. Keep You Safe makes it possible for subscribers to store all their personal data securely in a virtual online "safe-deposit box," and share the key with someone they trust. When Wolbrom, a self-described "security geek," finally had the chance to launch Keep You Safe, he knew that building it on Linux, Apache, MySQL, and PHP (LAMP) was the best way to keep his customers' data secure.

Keep You Safe was born of Wolbrom's interest in business disaster recovery and his own personal data security. Wolbrom learned his lessons from his grandfather, who escaped from Poland early in World War II, Wolbrom says. "He drilled it into my head that you always had to be prepared to run." Wolbrom's background is in business continuity and disaster recovery planning. "We do this for businesses, but why don't we do it for our personal data?" he asks. Wolbrom calls it "personal disaster recovery."

"Being a security geek, I had always created these text files that would keep the family numbers together, and then use one of the encryption tools of the day to encrypt it, and put it out on the Net." Wolbrom said he could never resist discussing the topic with his business continuity clients. "Have you ever thought of doing for your personal data what you are doing with your business information?" he would ask them. "I wrote this little how-to article for a client." From there, it was only a matter of time before Keep You Safe was born.

Keep You Safe gives clients the ability to either store records in text format on its servers, or to scan and upload copies of documents. Wolbrom says almost every technology that Keep You Safe is built on is open source, including the numerous custom applications he and his partner built to encrypt and store clients' data. Everything sits on top of a classic LAMP architecture: Red Hat Enterprise Linux, Apache, MySQL, and PHP. That is because open source is more secure than proprietary code, Wolbrom says. "I look at this like this: There is an old adage that security through obscurity is not security at all. If I am building something and I make it completely obscured, someone will find the holes in it and will be able to hack that thing. Windows is completely closed and people are constantly reverse-engineering it. With open source you have thousands upon thousands of people looking at the code. If we have lots of people looking, we are always going to find the bugs before they become an issue."

In keeping with that belief in transparency, the company provides a white paper (PDF) that explains the security process for passwords and logins, data encryption, data transport, network firewalls, patches, and backups. ...

Your login password is hashed using SHA-512, and is compared with the hash on file. The U.S. Government has approved SHA-512 for all applications using Secure Hash Algorithms. The uploaded files themselves are encrypted using AES-256, which, as discussed in a posting last week, is very strong encryption indeed.

In using the service, we notice that a decrypted copy of an online document you choose to view ("open") is stored in the Windows Temp folder. If the Temp folder is configured to reside on a RAM Disk then the contents will be wiped out every time you reboot. If the Temp folder is somewhere on your hard disk there is a small but non-zero risk that past files once stored there could be read.

Wolbrom highly recommends using open source to launch any kind of online business. "It is going to give you the lowest expense-to-deliverable ratio that you are ever going to find. And that is the key thing about open source -- it is just so much less expensive to build anything. It is one of the biggest benefits."

There has been some debate among the W.I.L. staff members about just how secure the Keep You Safe service is. A "whois" search on keepyousafe.com reveals that the domain was registered with GoDaddy.com and the company is a New York LLC. The server is presumably located in the U.S. One must assume that if "they" were really out to get you, some kind of password interception program could be installed on the server. Of course, first the existence of the account would have to be known to do this. The service would be more interesting still if it were based in, to pick a random example, Panama -- where W.I.L.'s site server is (nonrandomly) located. Since Keep You Safe has kindly used open source programs, this would be simple to implement -- in principle, if not in practice.

A final note: This service uses single key encryption. The same key is used to encrypt and decrypt data. If you want to allow access to your account by another person this means you need to use a secure method to convey the password to him or her. Regular email is not secure, for example. (See the W.I.L. educational offering apropos this subject, "Secure Email Communication with PGP".) Just as you would not send a duplicate of your home's front door key to someone taped to a postcard, you have to devote some care to this link in the security chain.

YOU SAY YOU WANT A REVOLUTION?

Bill Kauffman, author of the new, and recently featured, Ain’t My America: The Long, Noble History of Anti-War Conservatism and Middle-American Anti-Imperialism, gets his turn to review. Appropriately, it is the "post-campaign manifesto" written by Ron Paul -- the current-day politician most aligned with the old line conservatives featured in Kaufman's books -- The Revolution.

John Quincy Adams, whose wise counsel about America going "not abroad in search of monsters to destroy" is naturally quoted in Ron Paul's post-campaign manifesto, The Revolution, also provided what may, on some (distant, we may hope) day, be the epitaph on Representative Paul's congressional career: "Always vote for principle, though you may vote alone, and you may cherish the sweetest reflection that your vote is never lost."

Ron Paul votes alone and has done so for almost 10 terms now. Most men, faced with such vocational isolation, would have given in to despair or booze or golf long ago. Paul's irrepressibility is a marvel. Yet how stunned he must have been when in late 2007, midway through what appeared to be a quixotic campaign for the GOP presidential nomination, running as that curious thing, an antiwar Republican, he attracted standing room-only crowds and shattered records for internet fund-raising. The solitary man had tossed his message in a bottle out onto a wave, and back came tens of thousands of replies.

Votes? Well, that was another story, though he showed well in several caucus states in the libertarian West, and he has a following in the rural Northeast and upper Midwest, too.

Young people especially responded to Paul's brand of plainspoken, no-bullshit libertarianism. He has that "educating for liberty" style that I associate with the 1950s-'60s-era Foundation for Economic Education and its monthly The Freeman, upon which many a young libertarian cut his eyeteeth reading gentle homilies about the harmonies of free exchange and the impossibility of socialist planning. Those go-go-Goldwater kids devouring The Freeman grew up to form the core of the Reagan doctrinaires. Well, no one ever said they had good judgement. It is hard to stay sharp when you have OD'd on Leonard Read.

Goldwater to Reagan to Paul: One generation got old, one generation got sold, and now Ron Paul has given his volunteers of America this "long-term manifesto based on ideas, and perhaps some short-term marching orders."

The Revolution is what the blurbists used to call a runaway bestseller. It is simply impossible to imagine another also-ran achieving such success in his campaign's afterglow. (The Pensees of Joe Biden?)

Paul had long been a fixture of the hard-money libertarian right, but the response to his message seems to have extended his vision. He (and the uncredited aides who I assume helped him write the book) describes those who rallied to his banner as "Republicans, Democrats, Independents, Greens, constitutionalists, whites, blacks, Hispanics, Asian-Americans, antiwar activists, homeschoolers, religious conservatives, freethinkers." (Why, one wonders, omit Libertarians?) Despite their differences, "these folks typically found, to their surprise, that they rather liked each other."

Of course. Why should a homeschooling organic-farming family not be welcome in -- be exemplars of -- a coalition for peace and liberty?

Paul writes hopefully of a left-right alliance that bypasses the grifters and grafters who have clawed their way into positions as supposititious "leaders" always ready to sell out for 30 pieces of foundation silver. "Liberals at the grass roots ... have been deeply alienated by the various betrayals by which a movement they once supported has made its peace with the establishment," he asserts.

Where are the courageous McGoverns and McCarthys of today's liberal Democracy who will stand with Ron Paul against "undeclared wars without end, more and more police-state measures, and a Constitution that may as well not exist"? He invokes the shade of the late Idaho Democrat Frank Church on the dangers of government surveillance, and Church, whatever his flaws, was a pro-gun Westerner who saw himself as in some sense an heir of the great populist Sen. William Borah. Compare Senator Church with current Alabama Republican Sen. Jeff Sessions, whom Paul quotes as remarking, "Some people in this chamber love the Constitution more than they love the safety of this nation. We should all send President Bush a letter thanking him for protecting us."

What a dipshit.

Any candidate who wanders from the imperial reservation eventually bumps into the invisible fence of American political discourse. As Paul writes, "Dissenters who tell their fellow citizens what is really going on are subject to smear campaigns that, like clockwork, are aimed at the political heretic. Truth is treason in the empire of lies."

Paul, it must admitted, gave the "smearbund" an opening via what appears to be the only significant lapse in judgement in his career: his (probably absentee) editorship of a newsletter in which stupid and/or offensive racial jokes occasionally appeared in the late 1980s and early '90s. Paul is fallible. He made a mistake. But the gravity of this error pales in comparison to supporting the obscene Iraq War, as did every one of his opponents for the Republican nomination.

(Paul makes no reference to the newsletters in The Revolution, though he does say that racism is "a disorder of the heart" and "a particularly odious form of collectivism whereby individuals are treated not on their merits but on the basis of group identity.")

The Revolution is an able libertarian primer based on Paul's credo that "individuals have a right to life and liberty and that physical aggression should be used only defensively." The programmatic expression thereof, according to Paul, is "liberty, self-government, the Constitution, and a noninterventionist foreign policy." He makes no effort to camouflage the radicalism of his views: The draft is "totalitarian." The federal drug war has "dangerous and undesirable domestic consequences" and should be called off. Given his druthers, the cabinet would be shrunk to the triad of the departments of State, Defense, and Justice. All other governmental functions would be returned to the states and the people.

In the section on economics, he invokes the laissez-faire pantheon: Bastiat, Hayek, Mises, Nozick, Chodorov, Friedman. He outlines a voluntaristic alternative to the dole, scorning "the soul-killing logic of the welfare state: somebody else is doing it for me. I don't need to give of myself, since a few scribbles on a tax form fulfill my responsibility toward my fellow man." He also discourses at length on the monetary question, a subject on which I am so abysmally ignorant that I could pass for a Fox News anchor.

He is just "following the Constitution," Ron Paul says in his aw-shucks manner -- which is "the one option Americans are never permitted to hear."

Indeed, the barrenness of American political discussion was thrown into relief by Paul's presence in the debates. He would speak in the lost language of constitutionalism, and the McCains and Giulianis would look at him as though he had just announced that he was from Uranus. The snickers, the rolling of eyes -- one almost expected a Cuckoo's Nest-ian orderly to walk onto the stage and wrap Congressman Paul in a straitjacket. None of his opponents would have protested. The price of freedom, as Gore Vidal says, is eternal discretion.

The narrowness of a political realm whose limits are demarcated by Arthur Schlesinger's ghost and Bill Bennett's ghostwriter galls Paul. "For heaven's sake," he asks, "what kind of debate is it in which all sides agree that America needs troops in 130 countries?"

Paul quotes George Washington -- "Why quit our own to stand upon foreign ground?" -- as well as Jefferson's inaugural address commending to his countrymen, "peace, commerce, and honest friendship with all nations, entangling alliances with none."

He denies that this advice is obsolete, for "the principles enshrined in the Constitution do not change." No foreign aid, no interference in the affairs of other nations, no conscription, no entangling alliances, trade and cultural exchanges with all nations, a drastically reduced defense budget that is actually applied to the defense of our country: this is the Paulian foreign policy.

He praises Senator Robert A. Taft, the digging up of whose body is a capital crime in the capital. He calls himself a Taft Republican, which is a first cousin to a Grover Cleveland Democrat -- both endangered species in an age overrun by the Limbaugh-O'Reilly "conservatives" who have bourgeoned like triffids.

Paul refuses to give up on his party, and as a lifelong Democrat who am I to criticize him for that? He emphasizes his conservative lineage, quoting Russell Kirk, Felix Morley, Robert Nisbet, and Richard Weaver, and noting that the "most significant traditional conservatives in the postwar period were all wary of militarism to one degree or another."

Alas, the "conservative movement," once a hodgepodge containing men of learning and character like Kirk and Nisbet as well as the gaggle of ("ex") Trotskyists and Stalinists out to slay the god that failed (and slay the American republic, too), "now tolerates and even encourages anti-intellectualism and jingoism that would have embarrassed earlier generations of conservative thinkers." What can be done with such a movement other than pitching a last shovelful of dirt over the corpse, mumbling a few prayers, and walking into the sunlight?

As for the word "isolationist," which I have always thought had a nice pacific ring to it, Rep. Paul gives taxonomic reversal the old college try. He tags the unilateral bullies of the Bush administration "isolationists" and avers, "I favor the very opposite of isolation: diplomacy, free trade, and freedom of travel." And 'tis true that the "isolationist" Paul was the only GOP presidential hopeful to support lifting sanctions against Cuba.

He fires off this nice line: "Mine is an 'isolationist' position only to those who believe that the world's peoples can interact with each other only through their governments, or only through the intermediary of a supranational bureaucracy."

There is not much in this book about the campaign. Paul may have inspired a nascent revolution but he is hardly a presence in The Revolution. He does not tell stories from the trail. He does not crack jokes. The most memorable personal tale he tells is of watching in horror as a medical resident at the University of Pittsburgh in the mid-'60s, when a 6-month-old aborted fetus was dumped "in a bucket in the corner of the room. The baby tried to breathe, and tried to cry, and everyone in the room pretended the baby wasn't there."

Paul is a pro-life federalist. That is, he is a constitutionalist who would return the question of the legality of abortion and drugs and gay marriage and other vexatious social issues to the states. Federalism is the plank on which a left-right anti-imperialist alliance could balance. Will it work? I will get back to you after California legalizes dope and Louisiana bans abortion.

When, in the run up to Iraq War II, Representative Paul proposed that the Congress at least observe Article I, Section 8 and make a formal declaration of war, House International Relations Committee chairman Henry Hyde (R-Illinois) responded, "There are things in the Constitution that have been overtaken by events, by time. Declaration of war is one of them. There are things no longer relevant to a modern society. We are saying to the president, use your judgment. [What you have proposed is] inappropriate, anachronistic; it isn't done any more.

Hyde was laureled; Paul is libeled. He must feel sometimes like Charlton Heston being mocked and snorted over by the smug simians in Planet of the Apes.

His capacity for remaining undiscouraged is extraordinary. Talk about audacious hope: Ron Paul thinks the republic is salvageable. "We have not had a foreign policy that is proper to a republic for many, many years, and it is long past time that we reestablished one," he says. Amen, brother.

What a shame this man will not be elected president.

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