Asset Protection BLOG - Mark Nestmann

For sale in Thailand: Girls, Guns,…and Fake Passports

If you've got the money, and know where to look, just about anything you want—legal or illegal—is available in Bangkok.

In recent years, Thai police have cracked down against trade in drugs, prostitution, and weapons.  But one of the most profitable industries—the manufacture of fake passports—remained relatively unmolested, until now.

On April 26, authorities in Thailand arrested Mohammed Karim, a Bangladeshi man living in Bangkok, along with more than 1,000 finished and unfinished Malaysian, Singapore, Japanese, and U.S. passports—all of them fake.  This amounts to the largest confiscation of fake passports in at least five years. 

Karim allegedly sold the passports to middlemen who in turn sold them to gangs engaged in prostitution, terrorism, and smuggling.  The price was as low as US$95 per passport.

Thailand has a long history of passport fraud.  In 2005, authorities shut down much smaller fake passport ring and confiscated over 100 counterfeit documents.  And now this.  It makes you wonder why the U.S. Government printing Office chose Thailand, of all places, as its chosen location to assemble its supposedly state-of-the-art, ultra-secure electronic passports.  (I wrote about this decision here.) 

Fortunately, none of the faked U.S. passports were of the new electronic variety.  But given the fact that the company that developed key aspects of the new passports has accused the Chinese government of stealing its patented technology, it may just be a matter of time.

In the meantime, if you look in the right place, you may be offered the opportunity to purchase a fake passport.  Should you receive such an offer, don't take it.  If you're caught with a fraudulent passport, you could face not only loss of that document, but fines and imprisonment.

Fortunately, you have several options to obtain a legitimate second passport.  If you don't qualify on the basis of extended residence, ancestry, or marriage for a second passport, you can purchase a legitimate passport in exchange for an investment.  The Commonwealth of Dominica and the Federation of St. Kitts & Nevis are the only two countries that provide a legal mechanism for you to apply for economic citizenship, and, upon qualifying, make an investment in return for a passport.  (Click here to read more about these programs).

I'll be discussing economic citizenship programs at The Sovereign Society’s upcoming Total Wealth Symposium in Panama.  Mark your calendar for May 14-17, 2008.  For more information on this event, click here.

Hope to see you there!

Copyright © 2008 by Mark Nestmann

Anti-Terrorism Law Used to Investigate Dog Poop

As wacky as some of the anti-terrorist initiatives that I've written about in the good ol' USA, they don't hold a candle to those advanced in the United Kingdom.

Case in point: the U.K.'s Regulation of Investigatory Powers Act (RIPA).  When the U.K. Parliament enacted this law in 2000, proponents claimed it was urgently required to deal with "new technologies" allegedly used by terrorists, pedophiles, and the like.   

Among other provisions, this law:

• Allows the U.K. government to issue a secret demand for your e-mail and browsing records from your Internet Service Providers
• Facilitates mass surveillance of cellular phone calls
• Forces telecom companies to install equipment to facilitate mass surveillance
• Requires targeted individuals to hand over their encryption keys and passphrases

However, one of the lesser-known effects of theRIPA to enable local "Councils"—the U.K. equivalent of city governments in the United States—to conduct their own investigations using these same provisions.  The only limitation is that councils may not wiretap phones—this power is reserved for police and intelligence services.  Indeed, according to figures recently released by the U.K. Office of the Surveillance Commissioner, local councils initiate approximately 1,000 covert surveillance investigations each month.

Naturally, this authority is being used only to investigate extremely serious crimes.  Some of the "terrorist-related" offenses currently under investigation include:

• Pet owners failing to pick up dog poop allegedly left by their dogs
• The use of tobacco products by children under the age of 18
• Council residents failing to properly segregate their trash for recycling
• Parents lying on a child's application form for admission to an elite school
• Illegal dumping

This result should surprise no one.  "Surveillance creep" is a phenomenon I've long observed in laws originally enacted to fight serious crime.  Since such laws generally reduce the burden to obtain evidence, obtain a criminal conviction, or seize property, authorities naturally use the new law instead of older, more burdensome legislation. 

Nor is surveillance creep limited to the United Kingdom.  The USA PATRIOT Act, supposedly enacted to fight terrorism, is now routinely used in other types of criminal investigation.  U.S. civil forfeiture laws, enacted in the 1970s to crack down on drug kingpins, are now used to routinely to confiscate cash from unwitting motorists and others.  No criminal conviction is necessary.   

The only way to stop surveillance creep is to stop enacting laws that give governments carte blanche to take shortcuts in order to solve increasingly petty crimes.  In the meantime, if you live in the United Kingdom (or anywhere else), beware of sending e-mail.  A local council investigator may just be reading it, looking for evidence that you failed to clean up after your dog.

Copyright © 2008 by Mark Nestmann

Now Take That: Feds Put Billionaire Expat on No-Fly List

Each year, a few hundred Americans give up their U.S. nationality and passport.  It's a radical step, not to be taken lightly.  Most of those that do so have foreign-sounding names, as indicated by the list of expatriates published quarterly in the Federal Register.  Many in this group are presumably individuals who by circumstances of birth or parentage unintentionally became U.S. citizens.

It's not surprising that someone with no significant ties to the United States might wish to give up their U.S. nationality.  Among other responsibilities, U.S. citizenship brings about a legal obligation to comply with U.S. tax laws, filing an annual U.S. tax return, and paying U.S. tax on all income, anywhere in the world. 

But not expatriating Americans are accidental U.S. citizens.  Indeed, some very prominent Americans have given up their citizenship, including Sir John Templeton, chairman of The Templeton Group; Michael Dingman, chairman of Abex and a Ford Motor Co. director; Campbell Soup heir John Dorrance III; former Star-Kist Foods Chairman Joseph Bogdanovich; and Kenneth Dart, an heir to Dart Container and the US$1 billion Dart family fortune.

Why would a wealthy American give up U.S. citizenship?  For such Americans, the price of citizenship may require not only millions of dollars annually in tax payments, but also lost business and investment opportunities from the increasing number of individuals and institutions globally who refuse to do business with U.S. citizens or residents.  Laws like the USA PATRIOT Act, the Treasury Department's "qualified intermediary" rules" and the long arm of the Securities and Exchange Commission all contribute to this result.

However, expatriation is politically unpopular.  The image of former U.S. citizens living tax-free in some tropical paradise is an irresistible populist target.  As a result, anti-expatriation rules penalizing U.S. citizens and long-term residents who give up their citizenship or residence for tax avoidance reasons have been in effect for decades.  First imposed in the 1960s, the rules were tightened in 1996 and again in 2004.

These rules impose an alternative tax regime on expatriates' income and estate for 10 years after they give up U.S. citizenship if their income and/or past income tax liability at the time of expatriation meet certain thresholds.  Currently, the rules come into effect for expatriates with an estate larger than US$2 million or who paid more than an average of US$136,000 in income tax for the five-year period preceding expatriation.  They apply to the net combined amount of U.S. source income and income "effectively connected" with a U.S. trade or business, along with several other sources of income.

Various proposals before Congress would tighten these rules, most notably by imposing an "exit tax" on the unrealized gains of an expatriate's worldwide estate, including assets in retirement and pension plans.  (Click here to learn more about this Draconian proposal.)

While careful planning is essential, it's relatively easy to avoid U.S. taxes for the 10 years after giving up U.S. citizenship, should you be subject to the alternative tax regime.  The most important precaution is to avoid U.S. source income—although U.S. source income under the anti-expatriation regime has a wider scope than elsewhere in the Tax Code.  It's also possible to avoid tax on gains from certain types of U.S. assets by postponing their sale until after the 10-year period has elapsed. 

Without careful planning, however, the results can be a catastrophe.  Such was the case of a gentleman I know, a successful entrepreneur with a billion-dollar business, who has lived outside the United States for over a decade.  He recently gave up his U.S. citizenship, and not only wound up paying millions of dollars in unnecessary taxes, but also found himself on the Transportation Safety Authority's (TSA) "no-fly list." 

This individual—a long-time and vocal critic of U.S. economic, political, and military policy—has been a thorn in the side of the US government for decades.  And many such critics have found themselves mysteriously on the no-fly list.  I have no way of proving it, but I suspect that the circumstances surrounding my billionaire acquaintance's expatriation may have upset enough high-level government officials to result in his current classification as a suspected terrorist.

It's a sad commentary on the United States when it stoops to such petty means to punish someone whose only "crime" was to take perfectly legal steps to end his permanent obligation to pay U.S. tax.  And it will be sadder still when the exit tax, which enjoys overwhelming support in both the House and Senate, effectively slams the door shut for those considering following his example.

(Click here for more information on expatriation, and how you might be able to benefit from it.)

Copyright © 2008 by Mark Nestmann

Think Inflation is Bad Now? Just Wait Until this Radical Proposal Takes Effect

Quietly and with scarcely a whisper in the press, the U.S. Customs and Border Protection agency (CBP) has issued a proposed regulation that could lead to huge tax increases on just about everything imported into the United States.

Naturally, importers don’t really pay this tax…they merely pass the increased costs onto consumers, in the form of higher prices.

The proposed regulation would eliminate the so-called “first-sale rule.”  Under the rule, the value of imported goods for customs' purpose is based on the value of the first sale of multiple sales involving multiple parties.   And example might be a sale from a foreign manufacturer to a foreign distributor who then resells the goods to a U.S. buyer.

The CDP wants to change this value to the sale price between the distributor and the U.S. buyer—the last sale.  Naturally, this price is significantly closer to the retail value of whatever goods are eventually sold.  And that translates into much higher import duties.

Blame the World Trade Organization (WTO).  Its “Technical Committee on Customs Valuation” chose last sale over first sale, most likely to appease governments reluctant to join the WTO for fear of decreased customs’ duties.  And the CDP says it’s only doing what it’s obligated to do under U.S. treaty obligations.

Apparently, it’s not enough that Americans are already paying much higher prices for imported oil, and for all goods or services affected by skyrocketing oil prices.  It’s not enough that the collapse of the U.S. dollar has resulted in much higher prices for all imported goods.  If these rules become effective, count on much higher process for imported clothing, shoes, and baggage, among other goods. 

Fortunately, these rules won’t take effect without a fight.  More than 90 business and trade groups have petitioned the CBP to scrap or modify the proposal.  If they’re unable to bring the CDP around to their thinking, a court challenge is likely.

One thing’s for sure: we don’t need more inflation in the U.S. economy.  The CDP proposal is the wrong suggestion at the wrong time.

Copyright © 2008 by Mark Nestmann

Fingering Big Government's (and Big Businesses') Obsession with Fingerprinting

Could you be forced to submit your fingerprints for the offense of "driving while Latino?"  To apply for a job?  Or even as a condition to enter a Disney theme park? 

If you live in the United States, the answer is "yes."  And that's got me pointing my finger at some serious problems with these developments. 

Last night I had dinner with some friends here in Phoenix.  One of my friends—I'll call her Mary—has a friend named Roberto. 

Roberto is a native-born American, but comes from a Hispanic family.  And he received the shock of his life a few days ago when sheriff's deputies in Maricopa County, Arizona pulled him over while he was driving.

Roberto wasn't intoxicated or driving erratically.  In fact, it appears the reason he was pulled over—and detained for nearly an hour—was because he has a Hispanic appearance.

During the encounter, the deputies grilled Roberto about his immigration status.  They didn't believe his claims that he was a native-born U.S. citizen.  To add insult to injury, the deputies fingerprinted him.  Not subjecting to fingerprinting, they told him, would subject him to arrest. 

Maricopa County is hardly alone in this regard.  Police in Hawaii, Kansas, New York, Wisconsin, and perhaps other state as well, now routinely scan fingerprints when they stop motorists for traffic infractions.  At the same time, the FBI is investing US$1 billion in a national database that will combine fingerprint data with retinal scans, and even tattoos.

What's more, if you want to apply for a job, you may have to submit your fingerprints along with your job application.  Both state and federal laws now require fingerprinting for many types of jobs, particularly those involving contact with children, security, or with large sums of money.

But what really makes my finger wag is a policy instituted in 2006 at Walt Disney World in Orlando, Florida.  To enter the "Magic Kingdom," you must now submit to a fingerprint scan.  This is to prevent you from sharing or re-selling your admission tickets. 

However, as with many other surveillance technologies, fingerprinting is in many cases essentially "security theater."  The FBI claims a "zero error rate" in its fingerprint identification.  But that's simply not true. 

One problem is false matches.  A false match on a fingerprint left on a bag linked to a 2004 bombing in Spain that left 191 dead led to the arrest and detention of Portland attorney Brandon Mayfield.  After Mayfield spend two weeks in jail, prosecutors finally released him after realizing that "zero error rate" doesn't necessarily mean, well, "zero error rate."

Fingerprint readers can also be spoofed.  In 2005, Japanese cryptographer Tsutomu Matsumoto designed a system to trick biometric fingerprint readers.  Matsumoto's system involves duplicating an actual fingerprint through digital photo editing software and other advanced technology.  His design apparently fools fingerprint readers about 80% of the time. 

In other words, in the not-distant future, someone could hack the FBI biometric database, steal your fingerprints, duplicate them using Matsumoto's techniques or even more advanced methods, and then leave them at the scene of various crimes.  Guess who would be arrested? 

What routine fingerprinting is effective for is conditioning all of us to accept surveillance and routine searches and identity checks as a routine part of life.  And that has me pointing my finger…skyward.

Copyright © 2008 by Mark Nestmann

Government Stings: Don't Get Stung

Could you be arrested for stomping your foot in a restroom?  Prosecuted for accepting "hot money?"  Or imprisoned for clicking your mouse on a hyperlink that pops up in your Internet browser?

If you live in the United States, the answer is yes.  Welcome to the world of government stings. 

Former Sen. Larry Craig (R-Idaho) is only one of the most familiar victims of a government sting.  Last year, Craig visited a men's room at the Minneapolis-St. Paul airport.  There, according to the report of an undercover male police officer, he stomped his foot, rubbed his fingers together, and made other gestures that supposedly indicated he wanted to have sex with the officer. 

That was sufficient evidence for the officer to arrest Craig for disorderly conduct and "peeping."  Not long afterward, Craig resigned from the Senate.

How else might you become lured into an undercover sting operation?  Lots of ways.  Take money laundering, for instance. 

Let's say you work in a bank.  One day, an undercover officer approaches you and says he needs to take care of some "hot money."  The implication is that the funds were generated illegally.  If you accept the money--or even permit the officer to put it in a safety deposit box--you could be convicted of money laundering.

You don't need to know where the money came from.  All you need to know is that it came from, or was represented by an undercover investigator to come from, some form of illegal activity.   That makes undercover laundering sting operations a lucrative source of criminal convictions. 

What's more, all property "involved in" a laundering offense is subject to civil or criminal forfeiture.  Since the bulk of forfeited monies generally remain with whatever agency seized them, the incentives for abusive stings are immense.

A textbook example was the 1999 conviction of Esperanza de Saad, a South Florida banker who was the target of a money-laundering sting.  In setting aside his conviction, a judge ruled that an undercover informant who testified against de Saad never represented that the funds he was seeking to "launder" were the proceeds of illegal activity.

Increasingly, government stings occur in cyberspace.  Click on the wrong hyperlink, and you could go to jail.

Undercover FBI agents now routinely post links in online discussion forums, social networking Websites, and elsewhere purporting to depict minors having sex.  If you click on the link, and the FBI can trace your Internet connection, you can expect arrest, prosecution, and imprisonment for attempted possession of child pornography.

That's what happened to Roderick Vosburgh, a doctoral student at Temple University.  Vosburgh allegedly clicked on a FBI hyperlink that pointed to child porn videos.  Vosburgh, who has no prior criminal record, now faces a 10-year prison sentence.  Upon his release, he must register as a sex offender.

Some may defend government stings aimed against persons who might be predisposed to download child pornography as necessary to protect children from sexual predators.  But here's the scary part: using the same logic and legal reasoning, the FBI could send billions of unsolicited spam emails advertising illegal drugs, weapons of mass destruction, or anything else that's illegal.  Respond to the e-mail message in any way, and you just might be in for an extended visit at Club Fed.

How can you protect yourself?  Don't stomp your foot in a men's public restroom.  Don't accept or otherwise deal with money that has a dubious origin.  And be very, very careful of where you surf on the Internet. 

For hundreds more suggestions on how to protect your privacy and property, click here.

Copyright © 2008 by Mark Nestmann

Is "Real ID" Dead—or Just Waiting for the Next Terrorist Crisis?

Are there limits beyond which Americans will refuse to go in the so-called "War on Terrorism?" 

Apparently so.  Legislators in more than two-dozen states have enacted laws refusing to go along with an unfunded federal mandate that imposes security, authentication, and issuance standards for driver's licenses and state ID cards. 

The initial deadline for compliance with this "Real ID initiative" is May 11, 2008.  After that date, residents of states that haven't promised to issue Real ID-compliant identity documents won't be able to use their drivers' licenses to board a domestic airline flight, enter a federal courthouse, or for other official government purposes. 

Only, it appears that the Department of Homeland Security isn't that serious about enforcing the Real ID mandate.  To avoid a May 11 showdown, it has issued extensions to compliance with Real ID to every state that passed laws refusing to comply with it!  The DHS merely received assurances that these states will "eventually" comply with the requirements. 

Supporters of the Real ID initiative—part of a 2005 military spending bill—claim that it merely establishes common-sense standards to insure identity documents can't be counterfeited or falsified.  That, in turn, they say, will reduce terrorism, illegal immigration, and a host of other social ills.

If only that were true—it's not.  Harder-to-forge IDs won't stop terrorism, because making sure someone is who they claim to be doesn't prove they won't conduct a terrorist act.   

Most terrorists have no previously known links to terrorism.  Many of the 9/11 hijackers had no previous links to terrorism.  For that matter, neither did Oklahoma City bomber Timothy McVeigh.

Then there's the matter of whether Real IDs will actually be, well, real.  Proponents say the high-tech identity documents produced under the initiative will be tamperproof and impossible to counterfeit. 

But this claim is a bald-faced lie.  We need look no further than the newest generation of U.S. passports—those equipped with a supposedly tamper-proof radio frequency identification (RFID) chip similar to the one slated to be inserted in all Real ID compliant identity documents.  Last August, a computer security actually cloned a RFID passport.  Is it too much to imagine that clever hackers will similarly find a way to hack Real IDs?

But the most threatening aspect of the Real ID initiative is its creation of the equivalent of a national database to include details on nearly 250 million licensed drivers.  Each state must provide electronic access to all other states to information contained in its motor vehicle database. 

An interlinked system is a far greater security risk than a decentralized one with each state issuing ID cards according to its own rules.  That's because if hackers manage to penetrate it, they'll have access to identity documents in all 50 states—not just one. 

Moreover, since there's no requirement that the data on your Real ID be protected in any way, private companies can use the information in it at will.  Every retailer that requires identification will swipe your Real ID and then sell the data to information aggregators to be data mined at will.

Does the current standoff over Real ID mean the end of efforts to establish a national ID card?  Not at all.  If a lie is repeated often enough, people will believe it's true.  That's particularly true when it comes to the War on Terror.  If there is another terrorist attack on U.S. soil, the trend toward a national identity card—and national ID database—may be unstoppable. 

Copyright © 2008 by Mark Nestmann

What Happens if Your Offshore Bank Goes Belly-Up?

The sub-prime catastrophe has spread far beyond the United States.  It's hardly beyond the realm of plausibility that offshore banks could be affected. 

That concern came into particularly sharp focus last week, when Switzerland's largest bank, UBS AG, said it expected to write off a staggering US$40 billion in sub-prime losses.

So far, financial regulators have succeeded in preventing a widespread banking panic.  The closest we've come to that nightmare scenario is in the United Kingdom, where the government nationalized Northern Rock Bank after a run on the bank by depositors last September.  Not to mention last month's mysterious acquisition by JP Morgan-Chase of BearStearns.

It remains to be seen whether regulators can continue to sweep multi-billion-dollar problems in financial portfolios under the rug through expanded borrowings, selective capital injections, or further nationalizations.  But if you have substantial assets in any bank—offshore or onshore—you don't want to wait for the regulators to act.  You should take action now to assess the safety of the assets held in your accounts.

The assets in your account at any bank are either on or off the bank's balance sheet.  If they are on the balance sheet, and the bank becomes insolvent, those assets are at risk.  Your funds may or may not be protected by a national deposit insurance scheme.  If they're not, you're simply another unsecured creditor of the bank.   

Assets that are on the bank's balance sheet include checking accounts, savings accounts, money market accounts the bank operates, "unallocated" holdings of precious metals, and (at some banks) CDs.  The basic operating account for a bank (called a current account, giro account, or other names) is also on the balance sheet.  At offshore private banks, this operating account is the springboard for all other investments.

When you purchase securities—stocks, bonds, mutual funds, etc.—through your offshore account, the bank establishes a "safe custody" account for these investments.  Those assets are off the bank's balance sheet.  Precious metals the bank holds for you in "allocated" storage are also off its balance sheet. 

Naturally, investments in safe custody are subject to market risk, but they won't be affected if the bank becomes insolvent.  However, if your offshore bank goes belly up, it will likely be part of a larger economic catastrophe that would decrease the value of any securities portfolio.  Also, there may be a period of time where the securities an insolvent bank holds in safe custody can't be traded.

I'll be discussing additional ways to protect yourself from catastrophic losses in your bank accounts, both domestic and offshore, in an upcoming issue of The Sovereign Individual, the members-only newsletter for The Sovereign Society.

Copyright © 2008 by Mark Nestmann

Science Arrives in New Jersey Courtrooms

Trial lawyers in New Jersey, beware.  The state Supreme Court has ruled that a trial judge can determine whether evidence submitted is "scientifically reliable," or not.

That might not seem earthshaking.  But until this decision, accident victims in New Jersey didn't have to do much to win a lawsuit alleging that the incident resulted in permanent injury, and collect a big judgment. 

In many cases, they merely needed to find a medical "expert" to testify to the existence of permanent injury, and that the accident caused the injury.  Once they did so, a defendant had only a narrow right to submit scientific evidence suggesting that the injury was in fact, not permanent. 

That's no longer the case in New Jersey.  Last month, in a unanimous ruling, the state Supreme Court ruled that a trial judge overseeing a lawsuit based on a claim of permanent injury in a low-speed vehicle collision property admitted expert testimony based on data from low-impact crashes.  According to a defense witness, the data, taken from 17 studies over a 30-year period, suggested that the crash didn't cause the victim's degenerative disc disease.

The jury agreed.  And instead of delivering a jackpot to the victim, the jury awarded her a relatively paltry US$50,000.

That's still a substantial sum of money, but it's not enough to get trial lawyers excited when they encounter a potential client injured in a low-speed car crash. 

Perhaps in its own small way, this decision will spur other states to rein in the often-frivolous claims made in low-speed accidents. 

I suspect there's not much of a risk that trial lawyers in New Jersey—or any other state—will seek out new careers due to this decision.  We can only hope.

Copyright © 2008 by Mark Nestmann

Warning: Your Cat May Make You a Terrorist Suspect

In these halcyon post-9/11 days, we've learned apparently innocent actions can instantly convert us from "law-abiding Americans" into "terrorist suspects."

Just a few examples will suffice:

• Your reading habits make you a terrorist suspect. A senior at the University of Massachusetts came under investigation after he made an inter-library loan request for a copy of Mao Tse-Tung's paean to Communism called "The Little Red Book."
• Wearing the wrong shirt makes you a terrorist suspect.  A man trying to board a plane in New York was detained due to his T-shirt, which bore the slogan "We Will Not Be Silent" in both Arabic and English.
• Paying off your credit card bill makes you a terrorist suspect. Walter Soehnge, of Providence, R.I., found himself under suspicion of terrorist activity because he paid off a US$6,500 credit card bill.  Because this was much larger than his normal monthly payment, his bank froze his account and reported the payment to the Department of Homeland Security as a potentially "terrorist-related transaction." 

Well, we can now add another notable indicator of terrorist activity to this list: your pet, or in this particular case, your cat.

In this age of heightened awareness of terrorism, we're told we can't afford to let any possible terror activity go undetected.  One surveillance initiative is placing sensitive radiation detectors on interstate highways.  After all, you never know when Osama might be tooling down the highway with the ingredients for a "dirty bomb" in his turban.

The radiation detectors are so sensitive, in fact, that they recently uncovered an unlikely terrorist suspect: someone's pet cat.

Here's the story: a few months ago, police on Interstate 5 in the state of Washington were monitoring traffic for radiation emissions.  A vehicle whizzed by and the detector "alerted" to the presence of radiation. 

The police gave chase and pulled over the offending vehicle a few miles south of Bellingham.  A cursory search of the car revealed nothing of interest—with the exception of a "radioactive cat." 

The cat, it turned out, had recently undergone radiation therapy for cancer.  The tiny amount of residual radiation was high enough that it set off the detector. 

We're living in a very different world after the events of 9/11/01.  And the scary thing is, it's hard to predict what any of us might do create a terrorist profile for ourselves. 

In the case of the terrorist cat, the driver was released after he showed documentation of the radiation treatment.  I suspect he may have been grateful, after some reflection, that he had not recently undergone radiation treatment for say, prostate cancer. 

Copyright © 2008 by Mark Nestmann

The US Declares War on Iran (Part III)

Part I: America's Financial "Nuclear Attack" on Iran
Part II: The North Korean example

What could go wrong with America's effort to isolate Iran from the global finance system? 

Lots.  Soaring oil prices and a further slump in the U.S. dollar are the likely results of this policy. 

Iran's Revolutionary Guards have made detailed plans to close the strategically vital Strait of Hormuz if Iran is attacked militarily.  Through this strait between the Gulf of Oman and the Persian Gulf flows about 20% of global oil production; around 16 million barrels every day. 

America's attack on Iran's financial system is no less real, and just as devastating, as a military attack.  If the financial sanctions I described in the first two parts of this article begin to have a serious effect on Iran's economy, could Iran close the Strait of Hormuz?  It almost certainly could, although it remains to be seen if it will.

If the strait is closed, for whatever reason, oil prices will soar.  Some experts predict oil could reach US$200/barrel. 

Since oil is priced in U.S. dollars, those higher prices will be felt most in the United States.  That would be a catastrophe for the already reeling U.S. economy.  But the pain would be felt worldwide, leading to political pressure on the United States to reverse its sanctions.

Even if Iran doesn't to the Strait of Hormuz, severing its international banking relationships will disrupt transport and payment for the 2.5 million barrels it exports daily.  That's about 3% of global oil production.  That will put further upward pressure on oil prices.

It will also put downward pressure on the U.S. dollar.  Since oil is priced in dollars, oil prices and the dollar have a nearly perfect negative correlation: as oil prices rise, the dollar usually falls in value.  If oil prices go to $200/barrel, the dollar will almost certainly fall beyond its all-time lows of a few weeks ago.

Another threat to the dollar is that the global financial system is beginning to insulate itself against further declines in its value.  Many countries in Asia and the Mideast are selling their reserves of dollars and replacing them with foreign currencies and gold.  There are serious discussions of pricing oil in euros, or even gold. 

When the United States applies financial sanctions that make it more difficult to deal in dollars, it only exacerbates this trend.  Despite the apparent cooperation of Europe, Japan, and China in enforcing financial sanctions against Iran, this unity may not last long, particularly if oil prices soar toward US$200/barrel. 

Under the USA PATRIOT Act, the U.S. Treasury has the authority to confiscate the U.S. correspondent accounts of foreign banks.  If it begins confiscating the correspondent accounts not just of Iranian banks, but of foreign banks that deal with Iran, some banks may try to disconnect from the U.S. banking system altogether. 

That's a tall order, since the U.S. dollar still serves as the world's "reserve currency."  But it may be possible using clearing systems in other currencies or even with an electronic version of the Malaysian gold dinar.  (Former Malaysian Prime Minister Tun Dr Mahathir Mohamad has proposed that Islamic countries use the gold dinar as an alternative to the U.S. dollar in global trade and for reserves in central banks.)

The U.S. dollar has rebounded from its all-time lows of a few weeks ago.  But it's still on a precipice.  Blowback from America's declaration of financial war on Iran is only one more act that could launch it over the cliff.

Copyright © 2008 by Mark Nestmann

The US Declares War on Iran (Part II)

In yesterday's blog, I described how on March 20, the United States launched the financial equivalent of a nuclear attack on Iran.  Through the Treasury Department's financial intelligence unit, FinCEN, the Bush administration warned the world's banks that they do business with Iran at their financial peril.

FinCEN accuses all of Iran's banks, including the central bank, as constituting a risk to the international financial system, with no exceptions.

The nuclear analogy is not an overstatement.  To understand why, consider the experience of North Korea, which FinCEN blacklisted in September 2005.  Iran may be about to get the same treatment.

In North Korea's case, FinCEN published a "finding" alleging that its government used Banco Delta Asia (BDA), a small bank in Macau, to launder profits from drug trafficking and counterfeiting.  This put the world on notice that FinCEN could begin freezing the U.S. "correspondent accounts" of any bank dealing with BDA.  This draconian sanction is authorized in Section 311 of the USA PATRIOT Act and essentially prevents blacklisted banks from dealing in U.S. dollars. 

BDA customers reacted predictably: they withdrew assets in droves.  This forced BDA to freeze North Korean funds on deposit.  Subsequently, banks worldwide began terminating business relationships with North Korean clients.

From the Bush administration's viewpoint, the strategy worked.  North Korea became increasingly isolated from the global financial system.  That gave the United States enough leverage to force North Korea to shut down its nuclear industry, which had produced at least one crude atomic bomb  In 2007, North Korea signed two agreements promising to dismantle its nuclear weapons program.  It is now doing so, under U.S. supervision.

It appears that the Bush administration, acting through FinCEN, will follow a similar strategy with Iran.  If FinCEN issues a "finding" like the one it published on North Korea, the U.S. Treasury can begin grabbing the U.S. assets of Iranian banks, or of any bank doing business with Iran.  All Treasury needs to do so is to prevail in a secret civil forfeiture hearing in which the targeted bank has no right to participate.

The two banks named in the U.N. order—Bank Melli and Bank Saderat—Iran's two largest banks, will probably be the first ones blacklisted.  Iran's central bank, Bank Markazi, is also a likely target.  Whatever "special measures" the Bush administration decides to apply will be posted on FinCEN's Web site.   

The Bush administration's intentions are clear.  It intends to shut down Iran's international banking links until the country ends its own nuclear program, which is clearly more ambitious than the one now being dismantled in North Korea. 

To make the sanctions even more effective, the administration is trying to convince Germany, Japan, and China—three of Iran's key trading partners—to enforce them as well.  It's counting on banks in those countries, and others to be named later, to essentially cut off all financial relations with Iran.

If it works, count on seeing this strategy applied against other countries with which the United States has diplomatic disputes.  Indeed, it's a key part of presidential candidate John McCain's proposed international relations policy, as described in a recent issue of the influential journal Foreign Affairs.

Carrying out an undeclared financial war against Iran is not a risk-free strategy for the United States.  Find out why in tomorrow's blog entry.   

Copyright © 2008 by Mark Nestmann

The U.S. Declares War on Iran (Part I)

No, there haven't been any nuclear missiles launched, at least not yet.  No mobilization of U.S. forces on Iran's border   But on March 20, the United States launched the equivalent of an invasion of Iran, in the world of global finance. 

On that date, the Financial Crimes Enforcement Network (FinCEN), issued a "financial advisory" dealing with Iran.  FinCEN, a little-known bureau within the US Treasury Department warned the world's banks that if they do business with Iran, they do so at their financial peril.

But the FinCEN advisory was no less an act of war, albeit undeclared, than an outright invasion of Iranian territory.  In its advisory, FinCEN states that the entire Iranian banking system—including the Iranian central bank—represents an imminent risk to the international financial system. 

FinCEN bases this assessment in part on a highly creative interpretation of United Nations Security Council Resolution (UNSC) 1803 (passed on March 3, 2008).  In case you missed it, CR 1803 calls on member states "to exercise vigilance over the activities of financial institutions in their territories with all banks domiciled in Iran, and their branches and subsidiaries abroad."

But the coup-de-grâce for Iran came courtesy of another obscure agency, this one housed in Paris within the spacious bowels of the Organization for Economic Cooperation and Development (OECD).  This agency's name is the Financial Action Task Force (FATF).  On February 28, it issued a statement reiterating its concern about continuing deficiencies in Iran's anti-money laundering and terrorist financing laws. 

CR 1803 and the FATF's mild rebuke are a far cry from stating the Iranian banking system is a clear and present danger to the world economy, as FinCEN now states.  But that threat assessment is now official U.S. policy.

And if a bank with substantial connections to the United States carries out the transactions, they risk retaliation under the draconian sanctions authorized in Section 311 of the USA PATRIOT Act.  Section 311 allows the United States to freeze the U.S. assets of any foreign bank deemed to have correspondent banking or other substantial relationships with specific banks FinCEN identifies. 

What happens next?  We need look no further than the experience of North Korea, which FinCEN listed as an imminent threat to the global financial system in September 2005.   I'll discuss that experience and the possible outcomes of FinCEN's declaration of financial war on Iran in tomorrow's blog.

For a detailed analysis of the U.S. and global regime of financial sanctions against Iran and North Korea, see http://japanfocus.org/products/details/2707.

Copyright © 2008 by Mark Nestmann