Asset Protection BLOG - Mark Nestmann

Surf Anonymously with a "Virtual Private Network"

I probably don't need to remind you that courtesy of the "War on Everything," in the United States, basically everything you do online is subject to surveillance.

Your e-mail, your newsgroup visits, your Web browsing history, your online chat sessions, etc. all are monitored.  Much of the time, this monitoring occurs without any warrant or the review of any court. 

For instance, thanks to the USA PATRIOT Act, police can now issue a subpoena, with no judicial review, to obtain your online "records of session times and durations," as well as records of "any temporarily assigned network address."  This data makes it faster and easier to identify computer users and trace your Internet communications. 

Fortunately, it's not difficult to defeat this type of surveillance.  The secret is to use a technology called a "virtual private network" (VPN).

Internet-based VPNs encrypt connections at the sending and receiving ends, and keep out traffic that's not encrypted.  A VPN protects your data and communications from criminals, co-workers, and even your Internet Service Provider (ISP).  If the FBI comes calling and wants to know who you're communicating with, all your ISP will have to show them will be a connection to your VPN, and nothing more. 

There are numerous kinds of VPNs, some more reliable and secure than others.  I'm not competent to judge the competing standards, but I can say that I prefer VPNs that are non-U.S. based.  That way, the records the VPN provider maintains aren't subject to the USA PATRIOT Act and similar laws. 

Two VPN services that I've recommended in the past are Armorgate (http://www.armorware.com) and Diclave (http://www.diclave.net).  I've found Diclave easier to use, but Armorgate appears to offer a more comprehensive service.  Both are non-U.S. based: Armorware is in Canada, and Diclave in Germany.  (Diclave is in the process of being acquired by Panama-based Kryptohippie.  When the acquisition is complete in a few weeks, the http://kryptohippie.com Web site—now under construction—will use Diclave's VPN technology.)   There are many other VPN choices; the point is that if you care about your online privacy, you should be using VPN technology.

You may find (as I did) that certain applications aren't compatible with your VPN.  If that's the case, when you activate the VPN, your firewall may try to reset connections for the various services that require Internet access, or that at least attempt to connect to the Internet.  Don't provide permission for any application to reconnect that you don't need.  This increases security even more as there are fewer potential points of attack for a hacker or eavesdropper to exploit. 

VPN subscriptions aren't cheap.  Diclave, for instance, costs US$385 annually.  But only you can decide on what your privacy is worth. 

Copyright © 2008 by Mark Nestmann

The Locksmith Police Come to Texas

In Texas, locksmiths must comply with "know-your-customer" requirements similar to those in effect with U.S. financial institutions.

Really!

No word yet on whether Texas locksmiths must notify the U.S. Treasury Department if a customer locked out of his or her car engages in "suspicious activities."  But customers must now provide a laundry list of "proof" before locksmiths allow them to drive off in their own vehicles.

Here's the scoop from an alert reader:

"My daughter and I stopped at Sam's Club Tuesday night...and I accidentally locked my keys in the car.  After waiting two hours for the locksmith to arrive, he parked behind my car, preventing me from moving it.

"After opening the car, he started a routine that reminded me of what I had to go through last time I opened a bank account.  I had to show him not only my driver's license (understandably) ...but also the vehicle registration and proof of insurance! 

"He then went to the front of the car to match up the vehicle ID Number that was on the insurance card, along with the license plate and inspection sticker. 

"He explained that under a new Texas law, not only did he need to verify that I was the owner of the vehicle, but also that the license, title, and insurance were in order.  He also was required to have me sign a statement stipulating that the information provided was accurate.  If there were any discrepancies, he had to notify the Department of Public Safety.  Indeed, he couldn't let me leave without verifying this information.  That's why he parked behind my car, blocking me in. 

"He disappeared into his van for a few minutes doing his paperwork, along with my license, registration, and insurance information.

"When he was finished, he told me that a DPS officer regularly audits all this 'paperwork.'  Indeed, the police had come to his company the previous week for this purpose.  All the data he collects from motorists must be maintained for three years. 

"The DPS collects this information regularly, and then verifies the customer's name, address, registration, and proof of insurance.  If anything is out of line, the State of Texas will then cite the owner for 'Failure to Maintain Financial Responsibility,' resulting in a large fine."

I'm not sure what the situation is in other states, but in Texas, at least, call a locksmith at your peril.  If everything isn't in perfect order, you won't be allowed to drive off!

Naturally, this principle could easily be extended into other areas.  Just imagine calling the electrician to fix an electrical problem.  The electrician is required to switch off the electricity to your home, and isn't permitted to switch it back on unless you can prove you've paid your electric bill, not to mention your real estate taxes and homeowner's association fees. 

The Bush Administration actually proposed something of this sort by in 2002, allegedly as anti-terrorist measure.  In the now-disbanded Operation TIPS (Terrorism Information and Prevention System), postal employees, cable installers, telephone repair workers, etc. were asked to monitor "suspicious activities" in the private homes of U.S. persons. 

While the Homeland Security Act of 2002 officially shut down Operation TIPS, there's nothing to prevent someone coming into your home from notifying police that you're doing something suspicious.  So before you call the electrician, plumber, carpenter, etc., hide anything even remotely controversial from sight—books, posters, newspapers, etc.  And while you're doing so, reflect on how far the United States has come from its origin as, "the land of the free and the home of the brave."

Copyright © 2008 by Mark Nestmann

U.K. National ID Card Proposal Delayed

The Nazis had one, and so did the Soviets and apartheid South Africa.  Communist China has one.  And an increasing number of "free" countries have them as well.  Residents of Hong Kong, Singapore and even the Netherlands now have to carry their cards at all times.

What I'm referring to, of course, is a national ID card.  When the authorities ask for it, you MUST present it.  If you don't, you can be fined and in some countries, even imprisoned.

Without your national ID card, you can't leave your home.  In some countries, you can't shop without it.  In others, you need to present your national ID to obtain medical treatment.  Naturally, it's used to track all your financial transactions, your electronic communications, your travel history, etc. 

Governments that promote national ID cards say they're needed as an "anti-crime" measure.  Only, it turns out that the security surrounding any centralized database is often so poor that crime—especially identity theft—rises exponentially.

The United Kingdom is a case in point.  In just the last six months, the U.K. government:

• Lost two CDs containing bank details and addresses of 9.5 million parents and the names, dates of birth and National Insurance numbers of all 15.5 million children in the country;
• Sent 7.25 million parents an apology letter for this breach, with the letter containing much of the same sensitive personal data! 
• Had a Royal Navy officer's laptop stolen which contained personal identifying details of more than 600,000 people.

Not surprisingly, these losses, and similar ones, are causing an explosion in identity theft.  Even the chairman of banking giant Barclays isn't immune.  Earlier this month, the bank announced that a con man had stolen the equivalent of US$20,000 from his personal account in a credit card scam.

Who's taking responsibility for these losses?  Naturally, it's not the government.  Indeed, the U.K. Revenue & Customs agency actually blamed parents for letting their children's details fall into the wrong hands!

Despite its shameful efforts to blame parents for government data losses, the U.K. government has apparently come to realize that forcing a national ID card into existence isn't politically expedient.  A national identity "White Paper" recently proposed delaying the mandatory identification cards until at least 2012.  A voluntary scheme will begin in 2009 for U.K. citizens renewing their passports.

When that happens, you can count on an explosion in crimes, especially identity theft and forgery.  As security expert Bruce Schneier, author of Beyond Fear: Thinking Sensibly About Security in an Uncertain World, observes:

"ID cards will not reduce crime, fraud or illegal immigration.  Instead, ID cards encourage criminals to attempt forgeries, potentially exacerbating crime rather than reducing it.  Every credential has been forged.  As you make a credential more valuable, there is more impetus to forge it.  And even if we could guarantee that everyone who issued national ID cards couldn't be bribed, initial cardholder identity would be determined by other identity documents ... all of which would be easier to forge.

"But the main problem with any ID system is that it requires the existence of a database.  In this case it would have to be an immense database of private and sensitive information on every citizen -- one widely and instantaneously accessible from airline check-in stations, police cars, schools, and so on.  And when the inevitable worms, viruses, or random failures happen and the database goes down, what then?  Is the whole country supposed to shut down until it's restored?"

National ID cards are also a bad idea not only because the potential for abuse, but because of "surveillance creep:" a technology or law intended for one purpose, winds up being used for many others.

A classic example is the U.S. Social Security card.  Once stamped "not for identification," the number on your Social Security card is now required to file a tax return, open a bank account and to obtain a driver's license.  Does anyone really think national ID cards--including the U.S. "Real ID" initiative--will be any different?

Copyright © 2008 by Mark Nestmann

Is Captive Insurance for You?

The explosive growth in lawsuits mean that many U.S. businesses find it difficult or impossible to obtain liability insurance at a reasonable price.  Perhaps yours is one of them. 

One solution to this problem is to form a "captive" insurance company.  This is a company tailor-made to insure the risks of an operating business, or group of businesses. 

The arrangement is "captive" because the insurance company is generally dedicated to the insurance needs of the business or group.  Captives are also free to underwrite the risks of other related or unrelated businesses. 

Premiums for a captive are usually lower than commercial coverage because there are no expenses related to marketing, sales, and agent commissions.  In addition, premiums reflect the experience of a particular company or group of companies, rather than general market experience. 

In a properly structured captive, it's also possible to deduct the premiums paid to a captive insurance company, and grow those funds tax-free. 

Some of the top jurisdictions for captive insurance include Bermuda, the Cayman Islands, Guernsey, Luxembourg, Barbados, the British Virgin Islands, Ireland, and the Isle of Man.  A number of U.S. states have also enacted captive legislation.  Vermont is the leading U.S. captive jurisdiction.

Captive insurance also provides:

• Direct access to the reinsurance market, thus potentially providing coverage for risks not available through conventional insurance; e.g., nuclear risk, supertankers and labor stoppages;
• More effective claim management;
• Coverage more precisely tailored to a company's needs;
• Premiums paid the captive insurer are available for investment by the parent or associated companies;
• Increased investment options without restrictions by the U.S. Securities and Exchange Commission; and
• An independent profit center, if the captive acts as an insurer for other companies.

One problem with captives is that they're expensive to set up.  It's not uncommon for a business to spend US$100,000 or more to create a captive arrangement. 

However, you can reduce these costs by purchasing an interest in an already-formed captive in what's called a "protected cell company."  These so-called "rent a captives" make it practical for businesses with annual insurance costs under US$100,000 to benefit from the captive concept. 

Until recently, there was some doubt as to whether the rent-a-captive concept would provide the same tax benefits as a stand-alone arrangement.  The IRS has now issued a set of proposed rules that stipulate when an arrangement with a cell of a protected cell company qualifies as "insurance" for federal tax purposes.  This would make funds paid to the cell deductible as insurance premiums.  These rules are welcomed since they provide a "road map" to tax practitioners as to how to proceed.

Setting up a captive insurance company is a major undertaking that you should pursue only with expert tax advice.  There are many pitfalls for the unwary.  The insurance arrangements must be bona fide and adequately shift and distribute risks. 

Is captive insurance for you?  If you or your business, or affiliated group of businesses, have an annual insurance bill exceeding US$100,000, the captive concept could result in significant benefits. 

If you have questions about captive insurance, please don't hesitate to contact me at info@nestmann.com.  My group works with expert attorneys who can set up captive arrangements for many types of businesses. 

Copyright © 2008 by Mark Nestmann

Hope You Had an Offshore Account for Monday's Market Meltdown

Monday, Jan. 21, 2008, was a bloody one for global equity markets.  Yet, since most U.S. securities markets were closed for the Martin Luther King holiday, Americans were trapped in their securities positions.  Except, of course, for those with offshore bank accounts in place. 

If you had an offshore account, when you awoke yesterday morning to see the carnage in Asia and Europe, you could have taken immediate steps to protect yourself.  For instance, you could have contacted your offshore banker and left instructions to "short" selected U.S. stocks or index futures.  If you purchased foreign securities on U.S. exchanges (e.g., American Depository Receipts or ADRs), your positions were frozen until this morning.  But if you purchased those same securities on their home exchange, you could have sold them on Monday.  And, I might add, at a much higher price than you might receive today!

Of course, a holiday isn't the only possible scenario that could lead to the closure of U.S. exchanges.  After the attacks of Sept. 11, 2001, U.S. securities markets closed for four days.  During this time, investors with only U.S. bank or brokerage accounts had no way to trade securities.  But investors with foreign accounts could trade foreign securities on foreign exchanges without interruption.

A future attack on the financial infrastructure in the United States or another major country could lead to a longer suspension of trading.  There are historical precedents: in 1914, U.S. securities markets were shut down for four months!

The prudent strategy is to maintain a "nest egg" outside your country of residence in an offshore asset haven that is politically neutral, and thus a less likely target for terrorist attacks.

What country is best for your offshore account?  There are many to choose from, but one of my favorites is Austria, where I lived from 2003-2005.  Based on my experiences there, I've written an "insider" financial guide to Austria, entitled Austrian Money Secrets.  For more information, click here. 

Copyright © 2008 by Mark Nestmann

Instant Panamanian Passport—NOT!

At least once or twice a month, a reader contacts me to ask about an "instant passport" program from Panama.

My response has always been the same.  Panama does NOT have a legally sanctioned economic citizenship/passport program.  However, there are several possibilities for residence in exchange for investment.

Recently, though, a company in Panama contacted me telling me that I was wrong.  For a mere US$5,000 in legal fees, plus an investment in CDs at the Bank of Panama sufficient to generate US$750/month in interest, I could acquire a Panamanian travel document.  The company also claimed that, ""You can travel with it anywhere in the world as your sole passport."

This claim is highly misleading, according to attorneys I've contacted in both the United States and Panama.  Here are the facts:

CD-for-visa programs that lead to immediate residence status do exist in Panama.  In the program this company is promoting, you also receive a travel document.  That travel document is similar to a normal Panamanian passport, but it does NOT indicate Panamanian citizenship. 

You can use this travel document to enter or leave Panama.  However, other nations do NOT recognize it as a normal Panamanian citizen's passport.  If you present the travel document at a border crossing at any country other than Panama, it will likely NOT be accepted. 

This travel document is also about to be discontinued.  A well-connected Panamanian attorney has informed me that within the next few weeks, it will no longer be issued.  That decision is already final.

That attorney also told me, in reference to this particular CD-for-visa program:

"I have never recommended this program, and none of my clients have opted for it after having it explained how it works.  It always seemed foolish to me to put around US$200,000 with the National Bank of Panama, virtually forever, since the five-year fixed term deposits need to be continually renewed to preserve residence status."

Avoid this program.  It does NOT result in a normal Panamanian citizen's passport, and there are better ways to obtain a Panamanian residence visa. 

Click here to learn about citizenship-by-investment programs that result in the issuance of a legitimate passport.

Copyright © 2008 by Mark Nestmann

Retirement Crisis of 2008

Nightmare on the Costa del Sol

In the last three years, an enormous scandal has slowly developed in Spain.  It's now led to the forced demolition, without compensation, of a home purchased by foreign retirees.  And evidently, there's much more to come. 

Spain is very popular with expats, especially from the United Kingdom.  More than 800,000 U.K. expats now live in Spain.  Naturally, this influx of Brits led to a property boom in the areas in which the settled—especially in the Costa del Sol region, on the southern coast of Spain. 

Some developers purchased vacant land in areas of the the Costa del Sol (and elsewhere in Spain) not zoned for development.  The developers paid enormous bribes to government officials to issue building permits for these properties.  This greatly increased the value of the properties.  Once the condos, townhomes, or villas were completed, expats purchased them, in many cases spending hundreds of thousands of euros. 

Marbella, on the south Spanish coast in the province of Andalusia, was a prime target of such schemes.  Both the mayor and deputy mayor have been arrested on charges of bribery, corruption, and receiving compensation for illegal building licenses. 

But the officials involved in the corruption aren't the only ones suffering.  Spanish authorities have vowed to demolish illegally constructed dwellings, especially those built in "green" spaces reserved for beach access or parks.

While there are at least 30,000 properties potentially at risk, only one building has apparently been demolished so far.  On Jan. 2, 2008, bulldozers arrived at an Andalusian villa owned by British retirees Len and Helen Prior.  They had lived there peacefully for five years, and paid £350,000 to purchase it. 

The Priors won't receive compensation for the demolition.  Under Spanish law, they may actually be required to pay for the cost of the demolition.  They could even be subject to the criminal sanctions of the Spanish Penal Code (Article 319), which stipulates a prison term of six months to three years for building on land not officially designated for building. 

When you purchase real estate in a foreign country, you should assume that everything you know about real estate in your home country is wrong.  The property may not be zoned for residential construction, as the seller claims.  It may be legal for someone to simply move in when you're not around, and then file a claim for legal ownership.  You may also discover that you only have a right to live in the property you thought you owned.  Someone else may actually own the building, and the land it sits on.  Nor is it rare for shysters to sell you property they don't even own.  Years later, the legitimate owner may file a lawsuit to reclaim the property "stolen" from him. 

How could the Priors—or anyone else facing this nightmare—have avoided it? 

Before you purchase any property outside your home country, obtain independent advice from a licensed attorney in that country experienced in real estate law.  That attorney should thoroughly investigate the property: whether the seller actually has title to it, if it's in an area where squatters may legally take possession of it, and that the property is legally qualified for its intended use.

Like everything else offshore, when it comes to buying offshore real estate, it's caveat emptor.  Let's be careful out there!

Copyright © 2008 by Mark Nestmann

Take Your PC in for Repairs, Go to Jail

A Pennsylvania man learned the hard way that you have no right to privacy when your computer is repaired.

On October 15, 2004, Kenneth Sodomsky brought his computer to a Circuit City store in Pennsylvania.  When he arrived, he asked store technicians to install a DVD burner in it. 

To test operation of the burner, an employee searched for video files.  According to the employee's court testimony, the titles found included, "ages of either 13 or 14, and sexual acts."  After confirming that one of the video files was, in fact, pornographic, the employee contacted the store manager, who contacted the police. 

Police obtained a search warrant to search the PC and confirmed the presence of child pornography.  On Dec. 5, 2007, the Pennsylvania Supreme Court upheld the search and seizure procedure used in this case.  Sodomsky now faces criminal charges for possession of child pornography.

According to the Pennsylvania Supreme Court, when Sodomsky took his computer to Circuit City, he "abandoned" it.  Under the legal theory of "abandonment," you relinquish any expectation of privacy in the abandoned item.  If the person you leave your property with decides to turn it over to police, you have no right to object.

Many other states have similarly expansive views of abandonment.  Basically, it means you should NEVER turn any property over to another person if there is even the slightest chance that there might be something potentially incriminating on it. (The U.S. Supreme Court has declared the same principle applies to trash set out for collection.)

If Sodomsky had taken the simple precaution of encrypting or otherwise restricting his files, the result might have been different.  Since the files weren't encrypted, the Circuit City employee wasn't undertaking a "fishing expedition" by conducting an automatic search for video files in order to test the burner's installation. 

However, even with encryption, the result might have been the same if Circuit City technicians had found evidence of viewing child porn in Sodomsky's "cache" files.  These are the files automatically created by an Internet browser or ancillary software of images previously viewed. 

Pennsylvania, and several other states, have ruled that merely viewing child pornography is enough to be convicted of possessing it—even if the images aren't intentionally saved. 

And here is where the real danger lies.  Every day, billions of spam messages promoting pornographic Web sites are sent to millions of e-mail addresses—perhaps yours.  If you view any of these messages, the images they contain will automatically be stored in your Internet cache.  And that's sufficient evidence for you to be thrown in jail. 

How do you protect yourself?  Besides avoiding pornographic sites--particularly those that could be construed as promoting child pornography--the most basic precaution is to turn off disk caching—click here to learn how.

In addition, before you take in your PC for repairs, sell it, or give it away, be certain that it's not hiding any compromising content somewhere.  Among other precautions, that means you should defragment your hard drive, securely delete any unneeded files (using a program such as PGP), and wipe "free disk space" to make sure incompletely deleted files are, in fact, deleted.

I can't promise these precautions will remove every trace of pornography from your PC that you may have unintentionally viewed.  But they will go a long way toward proving that you had absolutely no intention of "possessing" child porn.

Copyright © 2008 by Mark Nestmann

More Passport Scams

Alternative passport and citizenship scams are alive and well. 

I recently discovered a Web site offering second passports from several countries, including Switzerland, Belize, The Bahamas, and Panama. 

I'm also aware of a Web site offering second passports from two unnamed countries in the European Union.  One clue that these passports are fraudulent comes in the promotional text, which claims that the price of a travel document from either of these EU countries includes a birth certificate. 

Passports from Guyana, Suriname, Nicaragua, and even diplomatic passports are also available.  Several Web sites also sell Dominican Republic passports. 

NONE of these countries have officially sanctioned citizenship-by-investment programs.  In all such cases, the resulting passports are subject to cancellation and confiscation at any time.  Worse, the persons using them could face fines and even imprisonment.

(However, some of Panama's immediate residence programs (including the pensionado program) offer a document called a cedilla to foreigners.  This is NOT a passport, and is only good for entry and exit from Panama.  The cedilla can't be used to cross other national borders.) 

When you purchase a second passport, be sure that the document you receive is officially sanctioned in law.  Currently, the only countries with officially sanctioned economic citizenship programs are Austria, the Commonwealth of Dominica, and the Federation of St. Kitts/Nevis.

Of these, only the Dominican and St. Kitts/Nevis programs offer a realistic path to a second passport and citizenship.  The Austrian program requires investing millions of euros in an Austrian business, with no guarantee that a passport will be forthcoming.  It's also politically controversial. 

In contrast, when you apply for a second passport in either Dominica or St. Kitts/Nevis, you make the necessary investment only after you receive approval for your application. 

Incidentally, if you have a handwritten Dominican passport, it's no longer valid.  You must renew it with a machine-readable document.  This is true regardless of the passport's expiration date.

For more information on legitimate economic citizenship programs, contact The Nestmann Group, Ltd. at info@nestmann.com. 

Copyright © 2008 by Mark Nestmann

Entertainment Industry: It's Illegal to Back Up Your CDs

Old fogies like me aren't participating in it, but there's a digital music revolution going on.  And the entertainment industry doesn't like it.

Since 2003, the Recording Industry Association of America (RIAA) has brought more than 20,000 lawsuits against anyone it believes is illegally downloading—or sharing—music or video over the Internet. 

Similar lawsuits are ongoing in other countries.

Essentially, what's going on is that computer users—mainly young people—are using the Internet to seek out music and video, and not pay for it.  Many of them offer to share music and video on their personal computers with other Internet users.  So-called "peer to peer" networks (such as Gnutella and TorrentSpy) facilitate this type of "sharing," which the RIAA, not unsurprisingly, considers theft.

I can understand why the RIAA is upset about file sharing.  I'm not sure what the best way to deal with the problem is, but the RIAA certainly isn't building goodwill by suing their most enthusiastic consumers.

But now, the RIAA has expanded its claims to a point that affects many, if not most, PC users.  In a lawsuit filed against Jeffrey Howell in Scottsdale, Arizona, the RIAA now claims that it's illegal to make copies of your own lawfully purchased CDs for personal use.  Even if you don't share them with anyone. 

If the courts uphold the RIAA's claim, it would presumably also be illegal to make backup copies of your computer software.  Indeed, it would presumably be illegal to make a backup copy of a copyrighted news story or book you purchased in electronic format. 

The RIAA has long warned users that copying CDs is illegal.  On its Web site, it claims that, "If you make unauthorized copies of copyrighted music recordings ... you could be held legally liable for thousands of dollars in damages."  However, the case against Howell seems to be the first time the RIAA has taken this position in court.  (The RIAA also accuses Howell of illegally sharing 54 sound recordings on his PC over a peer-to-peer network.)

Fortunately, the RIAA's extreme position seems unlikely to be upheld in court.  A series of court rulings in recent decades—including a famous Supreme Court case—found no violation in copyright law in using VCRs and other devices to make personal copies of a legally-purchased or otherwise obtained recording. 

I'll be watching this case carefully.  In the meantime, if you avoid using peer-to-peer networks to share music or video, you appear to be acting legally if you back up your own CDs—even if the RIAA says otherwise.

Copyright © 2008 by Mark Nestmann

U.S. Banks Impose Withdrawal Limits

Several weeks ago a reader forwarded me a message, supposedly from banking giant Citigroup, entitled "Change to Inter-Institution Transfers User Agreement."

I thought that the message, which drastically reduces the amount of money Citigroup account-holders can electronically transfer to another institution, might be a hoax.  But I've now confirmed that it's legit.

Purportedly as a "security measure," Citigroup has significantly reduced its daily and monthly limits on outgoing wire transfers.  The daily limit is now US$2,000 and the monthly limit is US$10,000.  (Click here to read the agreement.)

Citigroup is by far America's largest bank, with assets exceeding US$2 trillion.  It's also one of the most troubled.  You might recall that a few weeks ago, the Abu Dhabi Investment Authority provided Citigroup with US$7.5 billion to shore up its balance sheet in the wake of last summer's sub-prime fiasco. 

Some experts believe that when the smoke clears, Citigroup will need at least another US$10 billion to bring its capital up to minimum levels.  That's due to its decision to take US$49 billion worth of off-balance-sheet investments in structured investment vehicles back onto its own balance sheet.  Not to mention its promise to guarantee another US$58 in so-called "special investment vehicles" it manages.  And don't forget the US$17.4 billion Citigroup already took in losses and asset write-offs in the last few months.

Even healthy banks have imposed withdrawal limits.  My own bank, for instance, recently slapped a US$10,000 daily limit for outgoing wire transfers, or US$50,000/month.  That's a substantial improvement from Citibank's limits, but still sobering when you consider that until 2007 (according to banking insider James Sinclair), no major U.S. bank limited outgoing electronic transfers.

If you're a U.S. depositor in Citibank, and have a checking account there, you can write as large a check as you wish to move your money to a stronger institution.  But many foreign investors who have U.S. bank accounts don't have access to paper checks.  If they want to transfer money out of Citibank, or any other bank that has imposed such limits, they must do so electronically. 

Or, they can close their accounts altogether—an option that I suspect will be resorted to much more frequently as 2008 progresses. 

Copyright © 2008 by Mark Nestmann

USA Monitors Financial Transactions in the Channel Islands

I've long been skeptical about using the Channel Islands—Guernsey and Jersey, both islands off the British coast—as secure offshore financial centers.

My skepticism originated in the so-called "Cantrade Affair." 

In the late 1980s, a group of investors—including a dear, now departed friend—placed several million dollars with Jersey-based Cantrade, a subsidiary of the AAA-rated UBS Bank of Switzerland. 

Over the next few years, the investors lost virtually all their money.  A currency trader the bank recommended turned out to be corrupt.  So did a partner in the accounting firm (Touche Ross UK, now Deloitte & Touche), who falsely confirmed the trader's supposedly stellar long-term track record. 

Lawsuits and a criminal investigation followed.  The investors settled their case against Cantrade in 1997.  Cantrade settled the criminal charges in 1998 in an out-of-court settlement that avoided having the fraud exposed at a public trial.  The currency trader and the Touche Ross partner were sentenced to prison. 

Because of the Cantrade affair, I've pretty much written off Jersey as a serious offshore jurisdiction.  I simply don't trust it, although there have been significant reforms in the last decade.

I don't know as much about the other major Channel Island—Guernsey.  Rightly or wrongly, it's been a case of "guilt by association" with Jersey.  Until now, that is.

Last week, I received several messages from a reader in Guernsey who claims that IRS agents accompany tax inspectors in certain investigations.  He also believes that local police are monitoring telecommunications with offshore services providers, in concert with the FBI and the IRS. 

I have no way of confirming these allegations.  However, I can confirm that the "Tax Information Exchange Agreement" (TIEA) between the United States and Guernsey authorizes the IRS to accompany Guernsey tax officials in tax examinations (Article 6(2)).  And while wholesale electronic surveillance of offshore services providers may not be occurring, a local court may authorize surveillance against any target. 

I'm not picking on Guernsey, by the way.  Under Guernsey law (and the law of many other offshore jurisdictions), this type of surveillance is perfectly legal.  Naturally, U.S. and U.K. tax officials encourage it. 

This is an important reason why The Sovereign Society recommends offshore jurisdictions that impose strict controls on the disclosure of financial (or other) information to foreign authorities. 

In Austria, for instance, there's no Tax Information Exchange Agreement in effect.  If the IRS wants to learn about your Austrian bank account, it can't simply accompany an Austrian tax inspector to the bank, and surreptitiously examine the records.  It must present evidence a crime has been committed, with that evidence confirmed by Austrian officials. Similar laws are in effect in Switzerland, Liechtenstein, and Panama.

For more information about bank secrecy in Austria, click here.

Copyright © 2008 by Mark Nestmann

Revised U.S.-Canada Treaty Eliminates Tax Booby Traps—and Opportunities

Thanks to those intrepid treaty negotiators at the U.S. Treasury Department, there's now a bright, shiny, new "Protocol" in effect between the United States and Canada.

The good news about this Protocol—an amendment to the U.S.-Canada tax treaty—is it eliminates some sneaky tax traps that made it tricky for Americans to invest in Canada using "pass-through" entities such as limited liability companies.  (In a pass-through entity, the entity itself isn't taxed—only its owners).

Essentially, the Protocol makes it easier for a U.S investor in a Canadian business to obtain both limited liability AND to qualify for a substantial reduction of the 25% withholding tax on interest, dividends, and royalties received from a Canadian source.

It does so by stipulating that a U.S. resident (an individual, partnership, corporation, etc.) earning Canadian income through a pass-through entity (such as a limited liability company) is entitled to a reduction in withholding tax.  The "treaty rate" ranges from 0%-15%, and whatever tax is withheld can be applied against the U.S. tax liability of the U.S. resident.  For this favorable situation to apply, the income derived through the entity must be taxed the same way by the IRS as it would have had the income been earned directly by the U.S. resident.

The situation is especially favorable with respect to interest payments.  Canadian withholding tax on such payments in certain circumstances can now be reduced to zero. 

The bad news is that this treaty severely restricts what was once a great tax-savings strategy: the ability of U.S. resident shareholders of a Canadian unlimited liability company to be treated as a disregarded entity for U.S. tax purposes.  This status provided numerous opportunities for cross-border tax planning.  For instance, it permitted businesses investing in Canada the opportunity to consolidate losses from a U.S. federal tax standpoint.  It also maximized the availability of the U.S. foreign tax credit.  Fortunately, the new rules on such "hybrid entities" don't come into effect until Jan. 10, 2010, at the earliest.

There are a multitude of additional provisions in the Protocol, and it becomes effective over time, not right away.  Nonetheless, it's definitely a step toward normalizing bilateral tax relations between the United States and Canada.

Copyright © 2007 by Mark Nestmann

Reading the News Can Infect Your PC

If you're an Internet news junkie, beware.

Hackers have long used infected Web pages and e-mail attachments to spread "Trojan Horses"—programs that allow an outsider to take over your PC. 

Once your PC is compromised, a hacker has full control over it.  The hacker can read and write files, steal passwords, and address lists, even format your hard disk.  (However, hackers usually use networks of Trojan-infected PCs to attack other Web sits in so-called "denial of service attacks.")

But now, there's a new attack vector—the news.  Within hours of the December 27 assassination of former Pakistani Prime Minister Benazir Bhutto, one of the top three results on Google for a search under the word "Benazir" search led to a Trojan-infected Web page.  The Trojan spread rapidly across the "Blogosphere," and within 24 hours, more than 100 Web sites were serving it up to visitors. 

The infected Web sites promise a video of the assassination.  But if you try to download the video, you're prompted to install a new high-definition video "codec."  (A codec is a program that decodes the data stream to view the video.)  The codec contains the Trojan. 

The best way to protect yourself from such exploits is to use common sense.  Never install a program you're not sure you need.  For instance, if you're using the latest versions of Windows Media Player or whatever other program you use to view video clips, you shouldn't need to install additional software. 

Another precaution is to keep your anti-virus and firewall software up-to-date.  Within 24 hours of the assassination, most major anti-virus vendors had installed patches to prevent infection by this exploit.  (AVG Anti-Virus is a good choice for anti-virus software.) 

And with up-to-date firewall software—Comodo is a reliable choice—you'll receive a warning if your PC tries to "phone home" through a program you haven't authorized to communicate over the Internet. 

Copyright © 2008 by Mark Nestmann