Asset Protection BLOG - 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