Asset Protection BLOG - Mark Nestmann

What Your PC Knows About You

If someone could secretly stand behind you and monitor everything you've done on your PC, what would they discover about you that you would prefer to keep private?  Thanks to new technologies that secretly track everywhere you go on the Internet, that's an appropriate comparison of the threat you face unless you take advance precautions.

Perhaps you've never visited a Web site you wouldn't want your spouse, your children, your neighbors, or the FBI to know about.  Perhaps you really do have "nothing to hide."  But if you do, you'll want to understand the threat to your privacy—and what you can do to protect yourself.

The centerpiece of this threat is a tracking technology that records what Web sites you visit, what links you click on, and what types of search engine questions you ask.  If you've entered personal information into applications that use these technologies, that data is stored as well.  All of it is written to hidden directories on your hard disk.  And there it stays—permanently—unless you know how to delete it.

Usually what's recorded is innocuous.  You might not mind that your hard disk has a record of the movies you've rented, the fact that you're interested in photography, or that you want to take pilot lessons.  And you might not object to the fact that the companies that create these hidden directories sell the information.  For instance, a company selling photographic supplies would surely be interested in presenting an advertisement for its services to someone with a proven interest in photography.

However, perhaps your interests are a bit more controversial.  Or even if they're not, perhaps someone with access to your PC has less conventional preferences than you.  In that event, the data in the hidden directories could possibly come back to haunt you, should your PC ever be compromised—or searched by law enforcement.

Say, for instance, that you—or someone with access to your PC—watch a controversial video on the Internet.  Guess what?  The Web site serving up the video to your browser most likely plants a tracking beacon on your hard drive, where it stays—potentially, forever.  Erasing "cookies" in your browser will NOT delete these beacons!

The largest offender in this regard is probably a program called Adobe Flash Player (AFP).  Many Web sites use AFP to deliver audio and visual content.  But AFP also creates a hidden directory on your hard disk to track the Web sites you visit, especially those with interactive or multimedia features.  Companies that plant the beacons use them to personalize your browsing experience, and also sell the data they contain to direct marketing companies. 

Since you can't delete these files from your browser, the most practical way to deal with them is to install a browser add-on program to manage and delete them.  One such program is "Better Privacy," an add-on for Firefox.  You can download it at https://addons.mozilla.org/en-US/firefox/addon/6623/.  I've configured Better Privacy to delete all AFP beacons when I shut down my browser.

I also suggest that you configure AFP to minimize tracking altogether.  You can adjust its settings using a virtual control panel at: http://www.macromedia.com/support/documentation/en/flashplayer/help/help09.html. 

I've adjusted the settings on my PC to always deny access to my PC's camera or microphone, never storing any content, and deleting all records of Web sites I've visited that use AFP.  Those settings, together with the Better Privacy add-on, seem to have rid my PC of "beacons"—at least those from AFP.  These settings limit functionality on some Web sites, but so long as you configure AFP to allow programs to ask you for permission to store content, you can control which ones have access to your PC.  When you exit your browser, Better Privacy deletes them.

Incidentally, none of AFP's tracking software violates any U.S. law; at least none of which I'm aware.  And don't look to the government for help—law enforcement agencies surely find beacons on your PC a highly informative tool to track your Web browsing behavior.

With big business and big government collaborating to invade your online privacy, you have only one resource to depend upon—yourself.  So if you don't want permanent records of your online life residing on your hard drive, don't call your Congressman for help.  You alone must take responsibility for protecting your online privacy.

Copyright © 2010 by 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

What's Your Identity Worth?

Identity theft has met the law of supply and demand.  The law of supply and demand won.

Yes, identity theft is now so pervasive that the value of individual identities has fallen sharply.  What's more, a wealthy person's identity, with perfect credit, isn't worth much more than a deadbeat's identity.

That value, by the way, is about $10, perhaps a little more.  Just a few years ago, the black-market price for a pilfered identity was $100 or more.  But today, hackers are stealing so many more identities, that the value of each one has sharply declined.  

Indeed, about 11 million Americans suffered some form of data compromise in 2009.  Many of these victims suffered nothing worse than fraudulent charges on a credit card, but identity theft is a crime with the potential to turn your life upside down.  (If you have any doubt, read these horror stories).

Most identity theft stems from lax security at department stores, credit card processing centers, hotels, the military, and universities.  

If you serve in the military or attend a university, you can't do much to prevent identity theft stemming from lax security at these institutions.  Pay cash at department stores and hotels to prevent hackers from picking your credit card number out of a poorly secured data stream.  At hotels, though, you'll probably need a credit card to check in.  Pay cash in advance, and ask the hotel clerk not to authorize any payment on it unless there's an outstanding balance.

An increasing number of hackers target individual victims over the Internet.  Identity thieves may pose as your friend on Facebook, and then steal whatever personal information you reveal.  They can also trick you into visiting a fraudulent Web site posing as a legitimate one.  This is common with online banking scams, where identity thieves drain your account after stealing your log-on password.  Then they try to steal enough personal information to apply for credit in your name.  

The antidote for dealing with online identity theft is to be skeptical.  Do you really need 14 million friends?  That's the approximate number of friends Lady Gaga now has on Facebook.  Ask strangers who want to be your friend, "How do you know me?" If your new "friend" tells you that another friend referred them to you, ask that friend for confirmation.

A common ruse on or off social networking Web sites is an e-mail with an infected file attachment.  If you click on the attachment, a remote administration "Trojan Horse" program may take over your PC.  From that point forward, the Trojan may send everything you type or view to points unknown.

Another common scam is a bogus email, allegedly from a bank or online merchant.  The message contains a link routing you to an authentic-looking, but phony, Web site.  There, you're prompted to enter sensitive information such as your password, your Social Security number, etc.  A hacker may even plant malicious software in the servers that direct traffic on the Internet.  Even if you type in the correct address of a website (e.g., of a bank), the software sends you to a bogus one, where thieves can steal your personal information.  

Protect yourself by never clicking on unfamiliar attachments or entering personal information into an online form in response to an unsolicited e-mail message.  If you're not sure, call the company sending you the e-mail.  Don't call any number listed in the message, either.  It's probably a fake listing.  Instead, call the number on any statement the company has sent you, or look it up.  

Fortunately, it's difficult even for the best hackers to duplicate the "look and feel" of a commercial website.  Also, be alert to misspellings.  Another tip-off is if the website doesn't display the "lock" icon at the bottom of your screen.  If you have any suspicion the website isn't real, again, call the company.  

More advanced "spyware" installs itself on your PC as soon as you view an infected Web page in your browser or e-mail reader.  Protect yourself against this attack by using a free program called No-Script.  It's available for Firefox, and it preemptively blocks all potentially dangerous content from being loaded into your browser.  You can authorize individual components of the Web page to load by right clicking on the No-Script icon.  For Web sites you trust completely, instruct No-Script to load the entire page.

Identity theft is big business.  It's not going away anytime soon, either, because both online marketing companies and the government find the data you leave behind very useful.  So don't rely on the government to come up with a "solution" to identity theft.  Rely on yourself.

Copyright © 2010 by Mark Nestmann

RFID Tags on Your Underwear: No Reason to Panic

Lots of things concern me.  Wal-Mart's recent announcement that it would begin inserting radio-frequency identification devices (RFIDs) to tag certain clothing items isn't one of them.

Perhaps it was an unfortunate choice that Wal-Mart decided it would begin inserting what it calls "smart tags" on underwear.  What, exactly, does Wal-Mart want to track in your pants?  Nothing at all, it turns out.  All that it plans to do with the tags is keep better control over its inventory. 

Some privacy advocates have expressed concern that the tags "can't be turned off" and that they're "trackable."  Well, if the tags could be turned off in the store, and weren't trackable, they wouldn't help Wal-Mart manage their inventory. 

Fortunately, you can take off the tag without damaging your new pair of underwear.  But that leads to a new concern from some privacy advocates, who fear that marketing companies will begin scanning your garbage to track what you've purchased by the RFID tags you've discarded.

Well, maybe.  But I think the concerns about RFID tags are misplaced.  The real threat RFID poses, as I've written previously, is their use in identity documents.

Researchers have shown it's relatively easy to read data on RFID chips from a considerable distance.  One researcher recently read an RFID tag from over 200 feet away.  It's also possible to clone the new RFID chips used in supposedly "ultra-secure" passports.  One researcher even succeeded in replacing his own photo in an RFID-equipped U.K. passport with one of Elvis Presley, and even got a boarding pass for "Elvis"—30 years after his death.

And here's where the Wal-Mart initiative gets a little scary.  Once Wal-Mart and other stores apply RFID tags to their entire inventory, they could surreptitiously scan visitors to the store to instantly identify that person from whatever RFID-equipped identification document they're carrying.  They could then custom-tailor offers for the visitor based on past purchasing patterns.

Again, I'm less concerned by this privacy intrusion particular application than with others.  What happens if you're in an airport and terrorists who want to kidnap Americans begin surreptitiously reading RFID-equipped identification documents to identify U.S. citizens or residents?  Or if an enterprising identity thief figures out a way to match the data on your identification documents with your credit card numbers, Social Security number, etc.?

To protect yourself, consider the following precautions:

• If you carry any identification document with an RFID chip, keep it wrapped in foil except when you need to use it.  That makes it less vulnerable to remote cloning.
• When you check into a hotel, rent a vehicle, or carry out any other transaction abroad that requires you to present this document, don't let it out of your sight. 

Unfortunately, I can't recommend the most effective self-defense mechanism: to put your RFID passport in a microwave oven and switch it on for a few seconds.  That will destroy the RFID chip, but tampering with a passport is punishable by 25 years in prison.  Compared to that, identity theft is a small price to pay.

Copyright © 2010 by Mark Nestmann

Traveling to Myanmar on a Dominican Passport

By P. T. Freeman

I'm in Yangon, Myanmar after a long airplane ride across the Pacific from Canada and an overnight layover in Thailand. 

Entering Myanmar on my Commonwealth of Dominica passport was uneventful, as it has been for most other countries I have entered using it.  Since Dominica is a small, peaceful country, it doesn't draw undue attention—or hostility—as the U.S. passport I once carried does.  I find I'm much more free and inconspicuous while traveling on a Dominica passport. 

I landed at the Yangon airport, went down the escalator at the new terminal and went to the desk marked "Visa on Arrival".  The uniformed officer behind the desk gave me a one-page application to complete.  I also needed to provide a passport-size photograph.  I've learned to carry several of these with me when I travel internationally.

A few minutes after I submitted the form with my passport and photo, the officer instructed me to pay $30.  When I did so, he returned the passport to me with a Myanmar visa stamp.  Once I gave him my Disembarkation Card, I was admitted to Myanmar.  Next, I went to Passport Control where my particulars were entered into a computer and another photo taken.  Finally, I reclaimed my luggage at Baggage Claim, cleared Customs, and finally exited the terminal.

Many countries have a visa on arrival system.  While you will have a short wait at the visa desk, the system is convenient and relatively hassle-free.  Since border authorities now have the ability to check computer databases within seconds, look for this system to expand. 

Since I obtained citizenship-for-life in Dominica 11 years ago, I have traveled around the world on my Dominican passport.  I've only been questioned about it once, at London's Gatwick Airport, where the immigration officer asked if I still carried my U.S. passport.  After telling him "no," I was admitted into the UK without further delay. Also, on a trip to Switzerland, when I arrived in Geneva, the immigration officer had never heard of Dominica before!  He consulted a manual, verified that Dominica is a sovereign nation, and admitted me immediately.

And Myanmar?  While Thailand calls itself the "Land of Smiles," I find it applies more in Myanmar than in Thailand.  Most people are poor and obedient, but that doesn't take from the friendliness that I encountered.  Very few tourists visit Myanmar, so the people are very solicitous to those who come.  

Until my next post, I wish you pleasant journeys on your Dominican passport!

(P.T. Freeman is a pseudonym for a friend and business associate.  A former U.S. citizen, P.T. now travels on a Dominican passport.  To learn how you can obtain a Dominican passport, contact info@nestmann.com.)

Six Top Expatriation Myths

If you're a U.S. citizen or permanent resident, the U.S. government has assigned itself the right to tax your income, no matter where you live.  I sometimes tell U.S. clients that even if they jumped in the Starship Enterprise and traveled to the Delta Quadrant (30,000 light years away from earth at its closest point), they would still be subject to U.S. tax!

In response to the ridiculous—but unfortunately very real—presumption that U.S. citizens must pay income tax wherever they live, an increasing number of U.S. citizens are giving up their U.S. nationality.  Yes, it's a big step, and it means you no longer have the legal rights and privileges of a U.S. citizen.  You can't vote, for instance, and you no longer have the automatic right to live in the United States.  But this process of expatriation is the only way U.S. citizens can permanently sever the obligation to pay tax on non-U.S. income.

However, there are also a number of myths—many of them propagated over the Internet—about expatriation.  I'll be discussing these myths—and debunking them—in one of my presentations at The Sovereign Society's upcoming Offshore Advantage Academy event in Cabo San Lucas, Nov. 3-6, 2010. 

Here's a preview:

Myth #1: "Only a tiny number of people expatriate each year." 

It's true: the "official" number of people who take this admittedly radical step is tiny—only a few hundred annually.  The Treasury Department is supposed to publish their names in the Federal Register each quarter.  But the real numbers are much higher. 

One especially busy U.S. consulate in Switzerland expatriates three people daily with appointments booked a year in advance.  That comes to close to 1,000 expatriations annually—just from a single consulate. 

Another reason the official numbers are so low may be that the law mandating Federal Register reporting by the Treasury Department applies only to "covered expatriates."  These are individuals who have a net worth over $2 million, or who meet other criteria making them potentially subject to an exit tax.  However, none of the covered expatriates my firm has helped expatriate has had their name published in the Federal Register. 

I think the government doesn't want you to know that the number of people expatriating is exploding.  And it's willing to "cook the books" to make sure the information doesn't get out.

Myth #2: "You have to pay an exit tax on your net worth when you expatriate"

I was at a dinner meeting a few months ago where I was introduced to an elderly gentleman who insisted that anyone who expatriated would automatically forfeit 15% of his or her net worth.

When I asked him for a legal citation to this "fact," he simply repeated his assertion.  He also mentioned that he was a major contributor to the organization sponsoring the event we were attending.  That no doubt earned him some brownie points at this organization, but it doesn't make his assertion correct.

The fact is that the exit tax now imposed on U.S. expatriates only applies if you're a covered expatriate.  And even if you are, the exit tax only applies to unrealized gains that exceed $627,000. 

There's no exit tax on your net worth simply because you've expatriated.  Of course, that may change in the years ahead if Congress decides to put the screws to expatriates in some future law.

Myth #3: "You can only spend 30 days/year in the USA."
 
Another misconception is that if you expatriate you can only spend 30 days each year in the United States without becoming subject to U.S. tax on your worldwide income. 

This myth actually has some basis in fact, because it was true under an old law that was abolished in 2008.  And it still applies if you expatriated between 2004 and 2008.  But no longer.  Now expatriates are treated the same as any other non-resident alien (NRA).  In general, a non-resident alien can spend an average of 120 days/year in the USA without becoming subject to tax on his or her worldwide income.  This period can be extended in some circumstances.

Myth #4: "If you expatriate you can't come back."

There's another rumor that once you expatriate you can never return to the United States.  That's hogwash, although again there's a small basis in fact to the rumor. 

In 1996, Congress enacted the so-called Reed amendment to the Immigration and Nationality Act.  The amendment gives the Attorney General the discretion to deny entry into the United States to a former U.S. citizen who renounced U.S. citizenship in order to avoid U.S. taxation.  

Other categories of "excluded persons" are those with communicable diseases or other health conditions; those convicted of crimes involving moral turpitude or illegal drugs or with multiple criminal convictions; prostitutes; spies; terrorists; and draft evaders.

After Congress enacted the Reed Amendment, commentators criticized it for violating US treaties and possibly the US Constitution as well.   And nearly 15 years after its original enactment, regulations under this provision have not been issued, and its power has never officially been invoked. 

"Tax motivation" is no longer a factor in determining the status of a covered expatriate.  For this reason, the Reed Amendment may no longer be relevant, particularly since it has been so long since its enactment, with no regulations in place to enforce it. 

Given this history, it may be safe to assume that one can safely give up U.S. citizenship with no fear of future exclusion, particularly if you choose an expatriation option other than formal renunciation. 

Myth #5: "Expatriates lose Social Security benefits"

Again…not true!  No restrictions exist on Social Security payments sent to non-citizens in most cases.  The only significant restrictions are if you live in a country upon which the U.S. government has imposed trade or financial restrictions; e.g., Cuba, North Korea, or Iran. 

However, if you're not a U.S. citizen, depending on where you live, there may be a withholding tax of as much as 30% on the first 85% of your monthly payment.  This percentage may be reduced or eliminated if there's a tax treaty between the United States and your residence country. 

Myth #6: "Expatriates are automatically targeted for reprisals by the IRS"

Thank goodness this myth is false.  There is no IRS vendetta against expatriates.  Quite the opposite!  The IRS has much easier pickings going after people still living in the United States, with substantial U.S. assets.  It can use its resources more efficiently than to harass former U.S. citizens not living in the United States and with minimal or no U.S. assets or activities. 

Indeed the act of expatriation stops the clock on all future IRS obligations.  You still have obligations to pay past taxes, but the statute of limitations for collections eventually runs out assuming you've filed all relevant returns for tax years prior to expatriation.

Is Expatriation for You?

Exploding expatriation myths is just one part of the presentation I'll be making on this topic in Cabo San Lucas.I'll also be discussing:

• The best options for second citizenship and passport for prospective expatriates
• How to size up an offshore jurisdiction as a prospective low-tax residential haven.
• Tax planning for prospective expatriates with family members remaining in the United States…

…And much more. 

You won't want to miss it.  For more information on this event, click here:

See you in Cabo!

Copyright © 2010 by Mark Nestmann

P.S. To learn more about expatriation, check out my BILLIONAIRE'S LOOPHOLE report in the bookstore on my Web site, http://www.nestmann.com.

Could Your Offshore Jurisdiction Go Bankrupt? [Part II]

In Part 1 of this column, I described some of the financial challenges affecting numerous offshore jurisdictions, particularly current or former colonies of the United Kingdom.

But it’s not only English-speaking offshore jurisdictions that face serious financial challenges.  And in many cases, these jurisdictions are considering—and implementing—new laws and regulations that adversely impact non-resident investors.  Here’s a rundown of what to expect in the months ahead:

Non-English Speaking Jurisdictions Face Problems, Too

It's not only U.K. territories that face significant revenue shortfalls.

Uruguay is a great example.  If you’re legally resident in Uruguay, you pay tax only on your Uruguay-source income.  This policy has made Uruguay a popular destination for well-heeled expats.

However, last May, the government introduced legislation that would tax residents of Uruguay on their worldwide income.  The law would also impose a wealth tax on all offshore assets.  Needless to say, taking up residence in Uruguay looks less attractive than it once did, although the government now says foreigners who come to retire in Uruguay won't be affected.

Other popular low-tax jurisdictions facing significant revenue shortfalls include the Cook Islands and Dubai.

Cuba—the Sleeping Caribbean Giant

In the midst of this economic uncertainty, don't forget about the largest island in the Caribbean—Cuba.

Right now, with their offshore sectors in tatters, tourism is the major revenue stream for Caribbean offshore centers.  And in this economic crisis, tourism has fallen sharply.  Those tourists that still show up don't spend as much.  

But what happens to the Caribbean tourism industry when the U.S. Congress ends longstanding economic sanctions against Cuba?  There's broad support for this measure among U.S. farm and business groups.  It's going to happen, perhaps very soon. And when it does, U.S. tourists will find a new and exotic vacation haven beckoning them only ninety miles from Key West.

The Caribbean Tourism Association predicts that if the U.S. government drops all travel restrictions against Cuba, more than one million U.S. tourists would visit the island annually.  That's one million tourists who may not have the time, energy, or money to visit more remote Caribbean jurisdictions.  The impact on these islands' economies will be severe.

How Will Offshore Jurisdictions React?

The most politically expedient stance for cash-strapped offshore jurisdictions is to loot the assets of foreign investors who don't vote.  In order of increasing severity, such measures could include:

• Imposing personal and corporate tax on worldwide income.
• Confiscation of local assets in companies and trusts deemed "dormant." Last week, the Cayman Islands enacted legislation mandating this outcome.
• Restrictions or taxes on outgoing funds transfers.
• Forced dilution of shareholder equity in local companies.

What can you do to protect your investments against the increasing likelihood of less favorable tax, regulatory, and asset protection provisions in financially challenged offshore jurisdictions? In the August issue of The Sovereign Individual I’ll outline six strategies to protect yourself from these outcomes.  Just click here to begin your risk-free membership.

The unprecedented challenges now facing the offshore world aren't going away.  Make sure you're prepared for the unexpected!

Copyright © 2010 by Mark Nestmann

Could Your Offshore Jurisdiction Go Bankrupt? [Part I]

Offshore centers now face a perfect financial storm.  In more prosperous times, revenues from the offshore sector, along with tourism, helped fuel these countries' economies.  Their governments emulated more developed nations by borrowing heavily to build up their infrastructure.  They also bought votes with social programs and bloated government payrolls. 

When the global economy tanked, tourist revenues fell, along with revenues from their offshore sectors.  But the social programs and bloated payrolls remained.

Blame Offshore Tax Havens! (Again)

The economic crisis also led to worldwide drop in tax revenues, with the biggest losers big industrialized countries like the United States.  Politicians in these countries found a convenient scapegoat to blame for falling tax revenues: dozens of mostly tiny offshore centers. 

Using the economic crisis, the world’s richest and most powerful governments had the perfect opportunity to achieve a long-term goal: forcing offshore jurisdictions to enforce their tax laws.  They acted through non-governmental organizations they control, such as the Organization for Economic Cooperation and Development (OECD).  The OECD has the authority to issue supposedly non-binding "best practices" guidelines.  And, the OECD now decrees that “best practices” meant becoming tax collectors on behalf of these rich and powerful governments. 

The one-two punch of the global financial crisis and the OECD vendetta has led to unprecedented economic challenges for offshore centers.  Some—Gibraltar, Hong Kong and Singapore, for instance—remain in relatively good shape financially.  Others, particularly in the Caribbean, are having a hard time paying their bills.  The British press, for instance, refers to the Cayman Islands as "bankrupt." 

Could offshore jurisdictions facing the worst challenges actually declare bankruptcy?  Not if they can reduce spending, or qualify for additional loans.  A condition of additional lending, however, may be to impose direct taxes, such as personal and corporate income taxes.

Here's a rundown of where the offshore financial crisis now stands.

U.K. Government Declares War on English-Speaking Offshore Centers

It was once official U.K. policy to encourage responsible growth in the offshore sectors of its current and former colonies.  But, starting in the late 1990s, the U.K. government began to dismantle the offshore sectors of its former empire. 

It was easiest in U.K. overseas territories, where the U.K. Parliament has the authority to enact binding legislation.  In those territories, the British Foreign Office simply threatened legislation that would force those governments to enforce foreign tax laws.  To avoid that politically unpopular outcome, the overseas territories enacted the demanded laws on their own.

The most recent crackdown began in 2008, when the U.K. government commissioned an independent review, led by former Treasury official Michael Foot of its overseas territories and "Crown dependencies" with offshore sectors. 

The Foot Report observed that the global financial crisis had led to significant financial hardships:

The impact has been pronounced in Anguilla, the Cayman Islands and the Turks and Caicos Islands resulting in depleted public sector cash reserves. Bermuda and the British Virgin Islands have also experienced a decline in government income, but the impact has been less severe. Revenues have held up better in the crown dependencies [Jersey, Guernsey, and the Isle of Man] and Gibraltar.

The report recommended that those jurisdictions facing depleted treasuries should consider spending cuts and imposing direct taxes.  Foot suggested that any bailout by the U.K. government be contingent on a viable recovery plan, which presumably could include direct taxes.

Nowhere did the report state the most obvious possible recommendation: that the OECD back off and let these islands play by the same set of rules the OECD gives its own members.

Indeed, many OECD jurisdictions are themselves offshore centers: notably, Luxembourg, Switzerland, the United Kingdom, and the United States (the world's largest tax haven for non-U.S. resident investors).

The reality is that London is using the global financial crisis to undermine the low-tax regimes in place by arguing that the territories need to "broaden their tax base."

Hardball Politics

Just to make sure the remnants of its colonial empire got the message, the U.K. government has imposed much tougher standards for loans and loan guarantees. 

In 2009, the Cayman government, facing an $82 million budget deficit, appealed to its colonial masters in London for permission to borrow $310 million from banks.  Despite the fact that commercial banks had already approved the loans, the British Foreign Office said "no."  

The Cayman government then commissioned a team to conduct an independent review of the islands' fiscal challenges.  The review’s key recommendations were to cut government spending and to privatize most government-run enterprises. 

Reaction was swift and furious against the plan.  The Cayman government refuses to make significant spending cuts.  This makes an eventually bailout likely, with unfavorable terms in respect to direct taxes.  The government has also recently enacted legislation that authorizes confiscation of local assets in “dormant” companies and trusts.

What other offshore jurisdictions face problems?  And how are offshore jurisdictions reacting to the perfect financial storm they now face?  Stay tuned for Part II in my next blog entry.

Copyright © 2010 by Mark Nestmann

The Tax Hazards of a U.S. Passport

By P. T. Freeman

(P.T. Freeman is a pseudonym for a friend and business associate who is a former U.S. citizen.)

Recently, I was having a conversation with a friend of mine who is a journalist here in the Caribbean.  While she grew up in the islands, she was born in Florida. During my friend’s early childhood, her mother divorced and relocated to the Caribbean.  Subsequently, her mother remarried and the husband formally adopted my friend as his legal daughter.

In the course of our conversation, my friend mentioned that she had just re-discovered her long-lost U.S. passport in a drawer at her mother's home.  It had expired a few years ago.  In the intervening years, she had visited the United States several times, but using another passport.  This is a serious violation of U.S. law, because U.S. citizens must always use their U.S. passport to cross U.S. borders.  However, because her stepfather’s last name appears on my friend’s Caribbean passport, no "alarm bells" were ever triggered when she crossed a U.S. border.

But, this was just the beginning of my friend’s problems. I asked her is she was still filing U.S. tax returns.  “No,” she replied. “I left the United States when I was a child.  Why would I have to file tax returns there when I’ve never worked there or even lived there since childhood?”

I patiently explained that the United States requires its citizens to pay tax on their worldwide income, no matter where they live.  I also told her that she possibly faced a long prison sentence for not disclosing each year the existence of all bank accounts she held outside the United States with an aggregate value exceeding $10,000. And I mentioned that while she could make an appointment to give up her U.S. passport at a local U.S. consulate, she would continue to be subject to these taxes and criminal sanctions for all past years.  She could be arrested and taken into custody anytime she visits the United States!

Her response was a mixture of horror and disbelief.  After a few minutes, she replied "well, screw 'em!  They can keep their damn passport." 

I doubt that the Department of State will collect any passport renewal fees from this young lady!  But even if she formally gives up U.S. citizenship and “expatriates,” that still won’t eliminate her past tax or reporting obligations.  She needs legal representation in the United States to deal with these obligations, and it won’t come cheaply.

The moral of this story is that if you are a U.S. citizen, no matter where you live, you must file a U.S. tax return each year. You must also disclose details of every “bank, securities or ‘other’ financial account” to the U.S. Treasury each year, if their aggregate value exceeds $10,000 on Form TD F 90-22.1.  Incidentally, the information on the TD F form may be shared with virtually any government or police agency anywhere in the world!

Being a former U.S. citizen, I am no longer subject to these unreasonable and frankly dictatorial requirements.  Nor am I subject to U.S. jurisdiction, except to the extent of my U.S. investments, or when I visit the United States. 

That’s true freedom, and the essence of being a “sovereign individual.”

U.K.: Dismantling the Surveillance State?

The U.K. government has promised to do something unprecedented since the events of Sept. 11, 2001.  It plans to roll back key aspects of the surveillance state created by the "New Labour" party of Prime Ministers Tony Blair and Gordon Browne.

The coalition of the Conservative Party and the Liberal Democrats has its work cut out for it.  By many measures, residents of the United Kingdom are the most highly monitored in the world.

Under New Labour, the U.K. government enacted laws requiring persons using encryption to reveal their keys and passphrases at government demand.  It was at the final stages of a plan to force Internet Service Provides and phone companies to retain records of all e-mail and telecom data. 

The New Labour government also forced through an initiative to create national ID cards and biometric passports.  It created a national DNA database, with no right for individuals cleared of criminal wrongdoing to have their records expunged.

In addition, New Labour eliminated the right of jury trials for many offenses.  It also became very difficult for citizens to find out what information the government maintained on them.  New Labour's anti-terrorism laws permit terrorist suspects to be put under house arrest or curfew or electronically tagged, without access to the courts.

However, the most visible sign of surveillance is the U.K.'s enormous closed circuit television (CCTV) network.  A nationwide network of smart cameras captures up to 14 million photographs of motorists daily.  Images of vehicle passengers are then stored on huge database linked to license plate recognition software to track vehicle movements.  The most recent innovation in this system combines license plate readers with GPS satellite technology to catch speeders. 

The Conservative-New Democrat coalition promises to scrap key aspects of this surveillance network.  It has already canceled the national ID card scheme.  More importantly, it has abandoned the national identity register, the database on which ID card data would be recorded.  Biometric passports will also be discarded.

The coalition also promises to remove innocent persons' records from the DNA database and cancel the plan to retain e-mail and telephone records.  It also pledges to restore jury trials for some offenses, give citizens the right to learn what information the government maintains on them, and introduce safeguards against abuses of anti-terrorism legislation.  It even wants to "review" the use of CCTV. 

These are all very encouraging developments.  And in many respects, they're due to the efforts of one man, Liberal Democrat leader Nick Clegg.  In Clegg, the United Kingdom has an engaging and photogenic proponent for civil liberties.  Clegg promises U.K. citizens “a fundamental resettlement of the relationship between state and citizen that puts you in charge.”

I hope that's a promise he can keep—time will tell.

Copyright © 2010 by Mark Nestmann