Asset Protection BLOG - Mark Nestmann

How Many Laws Have You Broken Today?

If you're like most Americans, you violate numerous laws each day, probably without even knowing it.

As I wrote in a blog entry nearly three years ago, in New Jersey, you can be arrested for driving by your own home.  In Florida, a man was sentenced to six years in prison for carrying cash.  In Pennsylvania, a woman faces prison for yelling obscenities at her clogged toilet. You can even be imprisoned for the crime of withdrawing lawfully earned currency from your own bank account.

Over the past three years, the trend toward what I call "criminalization" of everyday conduct has only intensified.  (Criminalization is the conversion of conduct that was once considered a contractual dispute, or merely socially stigmatized, into a criminal offense.)

Now, according to federal prosecutors in New Jersey, violating a Web site's "terms of service" constitutes a crime. Under this interpretation, if you disregard—or simply fail to read (or understand) the lengthy and legalistic service agreement of any Web site, you risk imprisonment!

The defendants in this case purchased tickets in bulk from an online ticket reselling business, Wiseguy Tickets.  They stand accused of reselling the tickets at a higher price, in violation of Wiseguy's terms of service.  Prosecutors also brought hacking charges against the defendants for bypassing technical measures to prevent bulk purchases.  But it's the criminalization of violating a Web site's terms of service that concerns me the most.

Most Web sites say they can change their terms of service anytime. To avoid prosecution under this theory, you'd need to read a multiple pages of legalese every time you log in to your favorite Web site.  Even entering a fake name on a social networking Web site may be a crime!  Federal prosecutors in Los Angeles indicted a woman because she violated a social network's terms of service.  Fortunately, the trial judge threw out the case.

And there's no reason why this trend is limited to the online world. Imagine that you purchase a new car from your local dealer.  You drive it for a few months, never bothering to read the terms of service in the back of the manual.  One day you get pulled over for a traffic ticket.  The cop asks you where you buy your gas.  "From wherever it's cheapest," you reply.  "Wrong answer," says the cop, as he puts you in handcuffs.  It turns out that the terms of service stipulate that you must purchase all your gas from a specific gas station recommended by the dealer.  If you don't, under the DOJ's latest pet theory of criminalization, you'd be committing a crime.

Naturally, there's no way that police can arrest you every time you knowingly or unknowingly violate the terms of service for an online—or offline—product or service.  But the potential for arrest is always there, giving prosecutors wide discretion in pursuing the most visible—or more likely, the most politically viable—of such "crimes." 

The trend won't reverse itself until we convince lawmakers that criminal sanctions aren't necessarily the best way to deal with moral, social, or political problems and disputes.  Let's hope that time comes soon—although I'm not holding my breath!

Copyright © 2010 by Mark Nestmann

Jim Puplava & Simon Black Interview Mark Nestmann

Last week, I sat down for interviews with Jim Puplava of the "Financial Sense Newshour" and "Simon Black" of International Man. 

To listen to the interview with Jim Puplava, go to http://www.financialsense.com/fsn/main.php and scroll down to the April 17 interviews.  The interview will be archived at http://www.financialsense.com/fsn/2010.html.  My segment of the program begins 27 minutes into the clip.

Jim is founder and chairman of the Puplava Financial Services Group, which manages over $325 million for more than 900 clients worldwide.Jim and I discuss the economy, tax policy, expatriation, and other subjects in the interview.  

To listen to the interview with Simon, go to http://www.sovereignman.com/expat/important-information-about-capital-controls. It emphasizes the prospect for U.S. capital controls in the future. 

Simon  is an international investor and global entrepreneur.  He's a bit of a mystery man ("Simon Black" is a pseudonym) with a very keen mind.

Hope you enjoy the interviews!

USA: No Overt Capital Controls…Yet

Over the last week dozens of readers have sent me a link to an article with the provocative title of "It's Official—America Now Enforces Capital Controls."   In the article, author Tyler Durden states that the Hiring Incentives to Restore Employment (HIRE) Act signed last month by President Obama "requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS."

Mr. Durden is a terrific writer, and the series of articles he wrote analyzing the real causes of the crash of 2007-09 is the best explanation of these events I've read.  However, his article on capital controls is highly misleading.

I wrote about the implications of the HIRE Act immediately after its enactment here.  It's a terrible law that will make it much more difficult for U.S. citizens to invest, do business, or even live outside the United States.  But it doesn't impose capital controls, although it's an important step in this direction.

Along with requiring U.S. citizens and permanent residents to disclose a great deal more information about their offshore investments than they currently do, the law imposes a 30% withholding tax on certain types of U.S-source income and gross sales proceeds to foreign financial institutions (FFIs) and certain foreign non-financial entities (FNFE).  The only way to avoid the tax is for the FFI or a "withholding agent" for the FNFE to enter into an information reporting agreement with the IRS.  These rules become effective in 2013.

If entering into such an agreement violates foreign law…well, too bad.  Indeed, the HIRE Act states that if a FFI refuses to enter into an agreement with the IRS, it must close all accounts owned by U.S. taxpayers. 

So, the HIRE Act isn't about capital controls, at least not directly.  It's about enforcing IRS rules.  You can still have money offshore if you report it and pay tax on it.  The challenge will be to find a bank that will let you open and maintain an account. 

However, with this law, if the government ever imposes capital controls or foreign exchange controls, it will have a much more complete picture of assets U.S. taxpayers have stashed overseas.  It could then try to force repatriation of these funds, although as a first step I believe the government will simply impose a tax on all outgoing capital flows, as Mr. Durden postulates.  Fortunately, we're not there...yet.

Nor is this type of withholding new.  Numerous categories of U.S.-source income are already subject to a 30% withholding tax.  This withholding can often be reduced or eliminated if a tax treaty exists between the United States and the country in which the recipient of the income resides.  There's also a 30% withholding tax imposed on U.S. source income and gross sales proceeds payable to FFIs if the FFI fails to sign a "qualified intermediary" (QI) agreement with the IRS.  The QI rules have been in effect since 2001.

To recap, I think the main effect of the HIRE Act will be to make offshore financial services much more difficult for U.S. citizens and permanent residents to obtain.  It will also isolate the United States economically.  That has important consequences for the U.S. dollar and the market for U.S. Treasury debt.  Even without this law, the Treasury is already having problems finding buyers for the gargantuan U.S. budget deficit, as Eric Roseman recently described here.

One final note: if the U.S. government ever imposes foreign exchange or capital controls, it will be in response to overwhelming popular demand.  Those with investments outside the United States, or outside the U.S. dollar, will be labeled "greedy unpatriotic speculators."  The average Joe will believe the media hype and political posturing, and thus be manipulated into supporting them.

That's what happened in Venezuela.  And it could happen in "Amerika," as well.

Copyright © 2010 by Mark Nestmann

Congress Enacts Obama's Anti-Offshore Jobs Bill

In a recent blog entry, I described how the Obama administration is working simultaneously on three fronts to crack down further on U.S. citizens and residents who invest offshore.

One of those efforts has now come to fruition.  Today, President Obama signed the latest incarnation of the "Foreign Account Taxpayer Compliance Act."  It's neatly tucked into a jobs bill, cleverly entitled the Hiring Incentives to Restore Employment (HIRE) Act, H.R. 2847. 

Here's a summary of the offshore-related portion of this legislative train wreck:  

Imposes a 30% withholding tax on many types of U.S-source income and gross sales proceeds to foreign financial institutions (FFIs).  The definition of a FFI and includes every conceivable foreign investment vehicle.  The only way to avoid the tax is for the foreign institution to enter into an information reporting agreement with the IRS.  Information the IRS would receive includes your name, address, Social Security number or other taxpayer identification number, account number, and the account balance or value.  This provision comes into effect on Jan. 1, 2013.

Imposes a separate 30% withholding tax on payments made from the United States to certain non-financial foreign entities.  If you're a foreigner with U.S. investments, and you hold those investments through a foreign corporation or other non-U.S. entity, this provision will affect you.  To avoid the tax, you'll need to disclose whether the foreign entity has "substantial" U.S. owners (10% or greater interest).  The burden to make this disclosure will fall upon U.S. "withholding agents."  If the withholding agent (e.g., a domestic bank) fails to obtain the certification the IRS demands, it must withhold 30% of the payment to the foreign entity. This provision also comes into effect on Jan. 1, 2013.

Expanded offshore account reporting obligations.  If you're a U.S. citizen or permanent resident and hold foreign "bank, brokerage, or 'other'" financial accounts with an aggregate value of $10,000 or more, you must already make two separate annual disclosures.  The first disclosure is to the IRS on Schedule B of Form 1040.  The second is to the U.S. Treasury on Form TD F 90-22.1. 

However, if the aggregate value of assets you hold offshore exceeds $50,000, the HIRE Act imposes additional reporting obligations.  It requires you to also report any ownership of non-U.S. securities, any financial instrument or contract held for investment from a foreign issuer, and any interest of more than 10% in any foreign entity.  For investments in financial institutions engaged in trading securities, partnership interests, or commodities, you must report any ownership interest.  These expanded reporting requirements become effect Jan. 1, 2011.

Extended statute of limitations.  The HIRE Act also extends the statute of limitations on assessments to six years for significant omissions of income attributable to foreign financial assets.

Expanded reporting requirements for shareholders in offshore mutual funds.  You must now file Form 8621 annually if you own offshore funds, whether or not you have taxable income or gain from it.

Expanded definition of U.S. beneficiary of a foreign trust.  The Tax Code provides that the U.S. grantor of a foreign trust with a U.S. beneficiary is taxed on trust income.  Essentially, the IRS ignores the foreign trust for tax purposes.  The HIRE Act expands the definition of U.S. beneficiary to include any U.S. person who may receive an interest in the trust contingent on a future event, or where the trustee has discretion to make a distribution to that person.  The trust is treated as having a U.S. beneficiary unless the trust identifies the class of persons to whom distributions may be made and none are U.S. persons.  Further, a property transfer from a U.S. grantor to a foreign trust creates a presumption that a foreign trust has a U.S. beneficiary. 

None of these provisions come as much of a surprise.  Now that President Obama has signed the HIRE Act into law, he has escalated the U.S. government's war against all things offshore. 

The HIRE Act imposes much more stringent reporting and information exchange requirements on foreign financial institutions.  For that reason, I believe its main effect will be to further restrict access for U.S. citizens—especially those living in the United States—from offshore banks, brokers, and other foreign financial services companies.  This is likely to occur because the cost for these companies to continue doing business with Americans will increase sharply when these portions of the law become effective in 2013.

Copyright © 2010 by Mark Nestmann

How Babies are Like Sex Offenders

Your DNA is your genetic blueprint.  It's unique to you and your DNA profile is the equivalent of a bar code stamped on your forehead.

Only, you don't own this information.  In the USA, 15 states now collect DNA samples from anyone who's arrested.  In more than a dozen others, anyone convicted of a crime must submit a DNA sample.   Juveniles under 18 must provide DNA samples in 35 states upon conviction, and in many other states upon arrest. The FBI now collects DNA from anyone arrested for a federal crime, and from detained immigrants.  Failure to submit a DNA sample is a felony in some states.  

All these DNA samples become part of the FBI's National DNA Index System, originally set up to track sex offenders.  These samples are automatically matched against DNA left at crime scenes to try to identify criminal suspects.  

U.S. courts have generally upheld such collection procedures, and automated matches, from arrestees, convicts, and ex-convicts.  The logic is that if you commit a crime, you have diminished privacy rights.  Indeed, one court ruled that police can taser a suspect who refuses to voluntarily submit a DNA sample.

If you're not a criminal, perhaps you don't find this DNA data collection objectionable.  But what crime has a baby committed?  

In 2008, President George W. Bush signed into law legislation that authorizes the federal government to oversee the creation of state initiatives to screen the DNA of all babies born in the United States.  The official purpose of the database is for genetic research, but critics describe it as the first step towards a national DNA databank.

When your baby is born, the doctor takes a blood sample from it.  You don't need to provide permission, since the law mandates the collection.  Your baby's DNA is sent to a lab where it's screened for dozens of genetic diseases.  In many states, such as Florida, babies' DNA is stored indefinitely.  Some states "anonymize" this data by removing the name of the baby from the DNA profile; others don't bother.

If you object to this, guess what?  You don't have the right to refuse having your baby's DNA collected, tested, stored indefinitely.  Your baby's DNA doesn't belong to you, or to your baby.  It belongs to the government, and the government can make any use of it that Congress authorizes.

For instance, under what I call the "surveillance creep" principle, I think there's close to a 100% probability that your baby's DNA will eventually become part of the National DNA Index System.  When that happens, the law, in essence, will treat babies the same as sex offenders.   What's more, if Obamacare comes to pass, how likely do you think it will be the genetic profiles now collected on babies will be used to prioritize treatment for certain diseases?  Or to ration treatment for "at-risk" children?   I for one think it's very likely.

If you don't like the idea of the government collecting your baby's DNA and keeping it indefinitely, go to the Web site of the National Newborn Screening & Genetics Resource Center.  Follow this link to see how long your state keeps DNA samples, and if you have the right to request the samples be destroyed.

You could also arrange for a private birth at home and skip the DNA screening.  But this may violate state law, so before you take this step, find out what penalty, if any, exists for DNA refuseniks.  

Copyright © 2010 by Mark Nestmann

Want to be a Responsible Employer? Just Follow These "Simple" Rules…

Is housework becoming a burden? Then you might be considering hiring a housekeeper to help around the home.  But before you do, you'll want to understand your legal obligations when it comes to tax and immigration laws.

First, you need to contact the IRS and obtain an employer identification number (EIN).  To do this, download IRS Form SS-4.  To get your EIN over the phone, contact the IRS at 1-800-829-4933.

You'll be glad to learn that once you've obtained your EIN, you can be automatically enrolled in the Electronic Federal Tax Payment System (EFTPS).   This system lets you make federal tax payments online.  I highly recommend you do this. 

Never assume that you can simply send the IRS a check for taxes you as an employer have withheld.  That would be way too simple.  Indeed, an employer can actually be fined for sending a check directly to the IRS, if it's too large.  (I know, because it happened to me). 

You also need to withhold the appropriate taxes from your housekeeper's paycheck.  Make certain she completes Form W-4 so you know how many dependents she's claiming.  Also, you need to inform your housekeeper about various federal tax provisions such as the "Earned Income Tax Credit." 

Next, you need to give your prospective housekeeper Immigration and Naturalization Service Form I-9.  If your housekeeper doesn't speak English, you (or someone fluent in your housekeeper's mother tongue) will need to complete it for her (or him).  You'll find it helpful to keep a copy of the INS's "Handbook for Employers" handy so you understand what forms of identification are acceptable.  Don't forget that if your housekeeper isn't a U.S. citizen, she must prove her eligibility to work in the United States. 

If you're tempted to skip this process, you should know that hiring an illegal alien, of course, is…well, illegal.  You can be fined and imprisoned up to five years for "felony harboring" of an illegal alien.  But don’t worry…in most cases you'll only face a civil penalty.  Fines range from US$250 for a first-time offender up to US$10,000. 

But I digress…and you wouldn't want to break the law, would you?  And besides, we're just getting started! If your housekeeper doesn't have a Social Security number, she'll need to apply for one using IRS Form SS-5.  Naturally, if she doesn't speak English, you (or someone fluent in her language) will need to assist her in gathering the required documents and completing the application.

Next, you'll need to register yourself as an "employer" at your state employment agency.  Basically, you'll apply for Unemployment Insurance Tax Account Number and then begin making quarterly or monthly payments to the state employment agency.  Of course, there's a form to submit with each payment.  And as you'd expect, those failing to make the payments, or complete the form, may be severely punished. 

Also, once you register as an employer, auditors can make announced or unannounced visits at any time to make certain your complying with state unemployment rules.  So can representatives of the federal Occupational Health & Safety Administration (and state agencies with the same mandate), in order to enforce workplace safety rules. 

Are we having fun yet?  I certainly hope so, because we still have a ways to go!  The next step is to register as an employer with your state revenue department.  In Arizona, you can actually register as an employer for unemployment insurance purposes and for employer withholding tax purposes on a single form.  But in most other states, you need to complete separate forms.  Not surprisingly, once you register, you must file quarterly or monthly forms with the state tax department, along with whatever tax you calculate must be deducted.  You'll also need to file a year-end employer tax return. Once again, severe penalties apply for those tempted to ignore these requirements.

Don't forget to check local licensing requirements.  You may need to apply for an employer license.  In some cases, you'll discover that you won't receive a license unless your home is zoned "commercial" and not "residential."  If that's the case, you won't be able to hire the housekeeper. Sorry!

Well, we're almost done! Just remember that by February 1 of each year, you need to give your housekeeper IRS Form W-2 (typed, not handwritten, please!).  Don't forget to mail IRS Form W-3 to the Social Security Administration by March 1.  Penalties naturally apply for failing to meet these deadlines.

By now, you may just be tempted to start scrubbing the toilets yourself.  But wait!  President Obama is coming to the rescue. 

Last week, the White House sponsored a “Jobs Summit” to get ideas on how to create new jobs.  The gathering of professional politicians, community organizers, university professors, representatives from liberal think tanks and union bosses seems certain to generate millions of new jobs.  After all, private companies can no longer negotiate the maze of local, state, and federal regulations necessary to hire anyone.  But fortunately, we can trust these "experts," most of whom have never been an employer, or even worked for a for-profit company.

Obama did say one thing that might be helpful.  He claims he wants “fresh perspectives and new ideas”  to create new jobs.  Here's one: how about eliminating 90% or more of the bureaucratic maze prospective employers have to negotiate in order to actually put someone on the payroll? 

Somehow, I suspect this suggestion may be omitted from the White House report to be published on the Job Summit...

Copyright © 2009 by Mark Nestmann

Yes, You ARE a Criminal…You Just Don't Know it Yet

How many felonies have you committed today?  If you're like most Americans, you probably violate federal or state law several times each day, without even knowing it.

Just ask Sally Harpold.  A resident of Clinton, Indiana, Sally purchased some cold medicine for her husband back in March.  A few days later, she purchased some additional cold medicine for her daughter.

Four months later, police showed up at Sally's door with an arrest warrant.  Her crime?  She had purchased more than 3.0 grams of pseudoephedrine, a common and legally available decongestant for runny noses.  Deputies led Sally away in handcuffs, and the local newspaper ran her mug shot on the front page.  The headline read, "17 Arrested in Drug Sweep."

Sally didn't realize—and no one at the drug store told her—that pseudoephedrine is also an ingredient used in the manufacture of crystal meth, a highly addictive drug.  Many states, including Indiana, now restrict sales of pseudoephedrine.

You might think that the authorities would have backed down when they realized that Sally had no intention of manufacturing crystal meth.  But you'd be wrong.  "The law does not make this distinction," said Vermillion County Prosecutor Nina Alexander. "I'm simply enforcing the law as it was written."  She now faces up to 60 days in jail and a US$500 fine, along with a criminal record.

Unfortunately, this isn't an isolated incident.  Consider the sad case of entrepreneur and clean energy researcher Krister Evertson, who was recently released after serving two years in federal prison.  Until 2004, Krister had never been arrested.  But that changed on May 27, 2004, when federal agents driving black SUVs ran him off the road, pointed automatic weapons at him, and placed him under arrest.

Krister's crime was forgetting to put a federally mandated sticker on a UPS package he mailed from Alaska.  The package contained sodium (an ingredient in fuel cell research he was conducting).  Since federal environmental laws classify sodium as a dangerous material, it's illegal to ship it by air.  Krister knew that, so he packaged the material according to published federal guidelines, and even checked "ground transportation" on the UPS shipping form.

Unfortunately for Krister, he didn't realize that there is no ground transportation via UPS from Alaska.  All shipments, even those marked "ground transportation," go by air.  Federal prosecutors could simply have fined Krister for the mistake, but after ransacking his mother's home in Alaska, decided to indict him on felony charges.  Krister refused to plead guilty and in 2006, he was acquitted on all charges.

But that was just the beginning of Krister's ordeal.  Most of his fuel cell experiments took place in Idaho, and he stored a large quantity of sodium there in an industrial storage facility.  To make certain the sodium would be safe, he kept it in a reinforced stainless steel container with 3/8-inch thick walls. 

In the mind of federal prosecutors, however, Krister had "abandoned" the sodium.  So not long after his acquittal, the feds brought new charges against him based on a provision in federal law making it a crime to abandon "hazardous waste."  The fact that Krister had clearly intended to reclaim the sodium, and use it in future experiments, was immaterial.  This time, the jury convicted Krister and he spent the next two years locked up in a federal prison.

Once up a time, you had to knowingly violate a law in order to be found guilty of violating it.  However, in the last 50 years, legislators have largely eliminated the requirement for "criminal intent" to exist to be found guilty of a criminal offense.  It's no wonder that the United States has the highest per-capita incarceration rate of any country in the world.

Could what happened to Sally Harpold and Krister Evertson happen to you?  It could.  The only thing that's keeping you out of a jail cell is the fact that prosecutors haven't yet targeted you.  Just hope that they don't, because it's almost impossible to go through life without inadvertently committing numerous felonies on a daily basis. Here are a few examples.

Do you have a maid clean your home?  If you don't go through the time-consuming and expensive process of completing IRS and immigration forms, you're committing numerous crimes. 

Have you ever taken a vacation and written it off as a business expense?  If so, add tax fraud to your list of crimes.

Have you ever thrown anything away?  Better retrieve it!  Because under the Sarbanes-Oxley Act, you face criminal penalties if you destroy "evidence" relating to any actual or contemplated federal investigation, matter or official proceeding.  On the other hand, laws targeting identity theft in many states require you to securely dispose of many types of personal records.  So guess what?  By complying with a state law, you may have violated a federal law. 

Welcome to America!

Copyright © 2009 by Mark Nestmann

Big Brother Visits the Tattoo Parlor

Thinking about getting a tattoo?  If you are, better not pay cash!  If you do, the FBI has informed tattoo parlors in Los Angeles, and perhaps other cities, that you might be a terrorist. 

Yes, I'm serious.  You can read the FBI notice yourself by clicking here.  

Of course, paying cash at the tattoo parlor isn't the only thing that's suspicious.  The FBI helpfully warns that people who emit strange odors or who have missing hands or fingers might be suspicious.  So make sure to take a shower, and to wear your prosthesis, when you get your tattoo.

Another indicator of terrorism, apparently, are comments directed against the U.S. government.  So be sure to say nice things about Obama.  And for that matter, about George W. Bush as well.  That covers both political parties.  Also, be sure not to say anything about the blasting caps you recently procured, or about your plans to assassinate local politicians. 

It's also suspicious if a group of people all want the same tattoo.  God forbid you're a member of a fraternity or sorority in which pledges are encouraged to get "inked." 

So what's a tattoo parlor that wants to help the FBI fight terrorism to do?  If you show up with cash, smelling bad, missing limbs, or making vague threats against Obamacare, the tattoo parlor is encouraged to contact the City of Los Angeles Joint Regional Intelligence Center.  Also, it should
require valid identification from all customers and keep records of all purchases.  But my very favorite recommendations are straight out of the Stasi domestic spy manual:

• Talk to customers, ask questions, and listen to and observe their responses
• Watch for people and actions that are out of place
• Make note of suspicious statements, people, and vehicles.

I don't have any tattoos, and I've never spent any time in a tattoo parlor.  However, until it closed a few years ago, one of my favorite hangouts in Scottsdale was a little coffee shop next door to a tattoo parlor.  And every time I visited the coffee shop, I would briefly see some of the tattoo parlor's patrons, and even overhear snatches of conversation.

If anyone would be out of place visiting that parlor, it would be me.  After all, I don't have any tattoos, at least not yet.  Nor do I have piercings in my ears, nose, lips, tongue, or anywhere else, for that matter.  I don't have blue spiky hair, or any knowledge of "World of Warcraft." And, to the best of my knowledge, none of my clothes display Satanic symbols.

So I can just imagine what might transpire if I actually went in the door to inquire about a tattoo.  The patriotic proprietor would excuse himself, go to a back room, and pick up the telephone.

"There's a middle-aged guy carrying a briefcase who just came in to inquire about a tattoo.  He's 30 years older than most of our customers and he's babbling about something called 'limited government," whatever that is. He wants to pay cash, won't give us his Social Security number, and I don't think he took a shower today.  Can you send someone over to pick him up?"

Copyright © by Mark Nestmann

The Unacknowledged Implications of Obama's "War on Offshore"

Although the war of words between the United States and Switzerland has calmed down in recent days, the U.S. criminal case against Swiss banking giant UBS is still very much alive. 

As matters now stand, the IRS is demanding that UBS turn over banking records on more than 52,000 U.S. depositors.  It's waiting for the U.S. District Court in Miami to issue an order to UBS requiring compliance with its demand. On the other side, the Swiss Ministry of Justice has stated that it will block UBS from handing over the information, no matter what the court decides.

The latest news is that Micheline Calmy-Rey, Switzerland's Foreign Minister, will meet with U.S. Secretary of State Hillary Clinton on July 31 to discuss a settlement.  I expect that Calmy-Rey and Clinton will both want avoid a showdown between the United States and Switzerland.  The most likely outcome will be that UBS pays a hefty fine, releases a few thousand account records (but far fewer than 52,000), and then retreats to lick its wounds. 

However, the implications of this high-stakes financial drama go beyond UBS and indeed, beyond Switzerland. Looking at the bigger picture, it's obvious that the Obama administration wants to discourage Americans from investing outside the United States.  In recent months, the Obama administration and the IRS have launched a series of initiatives that if fully implemented will make it much more difficult for Americans to deal offshore. 

This isn't the place to discuss these plans in depth, but in addition to the criminal action against UBS, they include:

• A bill now before Congress establishing a presumption that any U.S. person with offshore dealings is guilty of tax evasion.  The taxpayer could rebut this presumption by presenting sufficient evidence to the IRS that he or she is in full compliance with U.S. law.
• An expansion of the IRS "qualified intermediary" requirements that would make it much more cumbersome for foreign banks and investors to invest money in U.S. securities.
• A dramatically expanded role for the SEC in policing investments of U.S. residents in non-U.S. securities, even for unsolicited purchases.

These initiatives aren't only designed to frustrate U.S. persons from investing abroad.  They're also designed so that foreign banks and brokerages will refuse to do business with them.  Indeed, a Deferred Prosecution Agreement that UBS signed in February 2009 to end an earlier lawsuit by the IRS requires the bank to terminate all cross-border business with U.S. clients and close their accounts.   

But it's not just UBS that's closing the door to U.S. clients.  In the last few weeks, I've received dozens of e-mails and phone calls from U.S. clients with bank accounts in Switzerland, Liechtenstein, Singapore, England, and other countries.  All have been informed that their accounts are being unilaterally closed or severely restricted. 

The situation is particularly serious for U.S. citizens living abroad.  In one case, a woman who's lived in Switzerland for 40 years had her Swiss account closed when her bank decided it would no longer service U.S. citizen clients.  This woman then contacted a U.S. bank to open an account.  The bank informed her that new due diligence rules from the U.S. Treasury no longer permitted it to provide banking services outside the United States. 

But the true implications are even broader, and affect the entire country, not just Americans who wish to invest internationally, or live abroad.  The U.S. government is now running multi-trillion-dollar annual deficits.  A large portion of this deficit is financed through foreign investments.  Given the protectionist barriers the U.S. government is erecting, it seems likely that at least some foreign investors will grow frustrated at being presumed to be criminals when dealing with U.S. financial institutions. 

In the short term, the U.S. actions may generate a modest amount of tax revenue—although far short of the US$100 billion in annual revenue postulated by IRS apologists.  But in the longer term, these protectionist measures are bound to make it more difficult for the United States to finance its gargantuan debts.  And this in turn could lead to a rise in interest rates and even greater erosion in the value of the U.S. dollar.

(The Nestmann Group, Ltd. can assist individuals whose offshore banks have severed account relationships in setting up alternative accounts.  Contact us at info@nestmann.com for more information.)

Copyright © 2009 by Mark Nestmann

Will Pandemic Declaration Lead to Financial Defaults?

Earlier this week, the World Health Organization declared the spread of the H1N1 flu virus, the causative agent of the so-called "Swine Flu" to be a "flu pandemic." 

This is the first time in more than 40 years that the WHO has made such a declaration.  And it seems rather odd that it would do, given that this "pandemic" has had such minimal impact.  The last time that the WHO declared a flu pandemic was in 1968, when the Hong Kong flu strain killed more than a million people. 

By contrast, as of June 15, the H1N1 flu strain has killed a mere 163 people.  That's a significant number, but by comparison, complications of ordinary flu kill about 36,000 Americans every year.  True, the spread of the H1N1 strain technically meets the definition of a pandemic—an epidemic that is geographically widespread.  Since its discovery in April in Mexico, the virus has spread to 74 countries on five continents.

But the pandemic declaration also has some very significant collateral side effects that could be extremely useful to banks, insurance companies, and hedge funds locked into losing positions on derivative contracts.  Call me paranoid if you want, but many such contracts contain a "force majeure" clause that allow the signatories to cease meeting their obligations in situations beyond anyone's control. Pandemics are typically listed as reasons for calling a force majeure.

Now, it so happens that Friday, June 19 is a very significant date when it comes to derivative contracts.  That's because the last hour of trading will be one of only four so-called "Quadruple Witching Hours" each year, in which contracts for stock index futures, stock index options, stock options and single stock futures all expire simultaneously.  That's only two days away, but if all hell breaks loose in the markets between now and then—or if any of the counter-parties for these contracts can't deliver—they may well declare force majeure.

Seen in this light, the WHO's declaration of pandemic may be more of an economic diversion than a public health emergency.  Indeed, interpreted in this light, a more accurate rendition of "swine flu pandemic" may be one its anagrams; "unwind limp faeces."

Copyright © by Mark Nestmann