Asset Protection BLOG - Mark Nestmann

Keeping the Slaves on the Plantation

The United States is the only major country that imposes tax on a citizen's worldwide income, no matter where that citizen lives. 

If you live in England, Ireland, Japan, or almost any other country, all you need to do to avoid the obligation to pay tax on your worldwide income is to leave.  After an extended period—normally one year or longer—you no longer have any obligation to pay taxes on your income outside that country (although you may continue to be subject to gift and estate taxes).

But not the USA.  To permanently disconnect from U.S. tax obligations, a U.S. citizen must not only leave the United States, but also take the radical step of giving up U.S. citizenship.  This process (from a U.S. standpoint) is called expatriation. 

The income tax savings from expatriation can be huge.  But for truly wealthy U.S. citizens, the biggest savings from expatriation don't come until death.  The US$1 billion estate if an Irish citizen dying in 2008 that didn't live in Ireland pays zero gift and estate tax for all bequests outside of Ireland.  The US$1 billion estate of an US citizen dying in 2008 who lived anywhere in the world pays a maximum combined gift and estate tax burden of exceeding US$450 million.

The arithmetic is almost as compelling for smaller estates.  An entrepreneur with a US$20 million estate could save over US$8 million in estate and gift taxes by giving up U.S. citizenship.

However, the image of wealthy former U.S. citizens living tax-free in tropical paradises is an irresistible populist target.  The result has been a series of increasingly stringent laws that penalize U.S. citizens who give up their U.S. citizenship with "tax avoidance" as a principal purpose.

Leave the USA, Pay an "Exit Tax"

Congress has now once again amended these "anti-expatriation" provisions in a new bill both houses approved unanimously, and sent to President Bush for his signature. 

The primary purpose of the Heroes Earnings Assistance and Relief Tax Act of 2008 is to provide a range of tax breaks for veterans.  But the law also imposes the first-ever "exit tax" on even moderately wealthy expatriates. 

Once President Bush signs this bill, future expatriates will be required to pay a tax on all unrealized gains of their worldwide estate, including most offshore trusts.  And the tax applies not only to former U.S. citizens, but also to long-term green-card holders who have resided in the United States for at least eight of the 15 years preceding expatriation.  (Fortunately, long-term residents can "opt out" of the exit tax, as I'll explain in a moment.) 

How are you supposed to pay the tax without selling your assets?  That's your problem—not the IRS's—although the bill permits deferral in certain circumstances.

You Don't Need to be "Rich" to Pay the Exit Tax

It would be one thing if the exit tax only affected billionaires.  But, with only a few exceptions for dual nationals and others with strong ties to another country, the law applies to any expatriate that:

(1)    has an average annual net income tax liability for the five preceding years ending before the date of the loss of U.S. citizenship or residency termination that exceeds US$139,000, adjusted annually for inflation; or
(2)    has a net worth of US$2 million or more on such date; or
(3)    fails to certify under penalties of perjury that he or she has complied with all U.S. federal tax obligations for the preceding five years or fails to submit any proof of compliance the IRS demands.

If you qualify under any of these criteria, you may be subject to the exit tax.  The good new—if there is any—is that the first US$600,000 of gains is excluded.  This exclusion doubles to US$1.2 million for a married couple filing jointly, both of whom expatriate.  This exclusion will increase by a cost of living adjustment factor after 2008.   

Gains will be calculated "mark-to-market"; i.e., the difference between the market value on the date of expatriation and the market value at acquisition.  Expatriates who were not born in the United States may elect to value their property at its fair market value on the date they first became U.S.-resident, rather than when they first acquired it. 

This phantom gain will presumably be taxed as ordinary income (at rates as high as 35%) or capital gains (at either a 15%, 25%, or 28% rate), as provided under current law.  When you actually sell the assets, no additional U.S. tax is due.  However, your adopted country might tax the gain a second time, leading to double taxation on the same income.

Your Retirement Plan Takes a 51% Haircut

And now for the really bad news: once you expatriate, you'll pay up to a 51% tax on distributions most retirement plans and most other forms of deferred compensation.  If there's a silver lining, it's that the tax isn't due until you actually receive payments from the plan. 

Plans covered by this provision include:

·    Qualified pension, profit sharing, and stock bonus plans
·    Qualified annuity plans
·    Federal pension plans
·    Simplified employee pension plans
·    Simplified retirement accounts

Tax is imposed in two steps.  The entity responsible for making the payment must withhold a 30% tax from any distributions to a "covered expatriate."  That entity must also withhold a second 30% tax for payments to a "non-resident alien individual."  Applying these two taxes sequentially results in a 51% net tax. 

Similar rules (but with some added complexities) apply for distributions from non-grantor trusts; i.e., trusts for which an expatriate is not treated as the owner under the grantor trust rules. 

Your individual retirement account is NOT eligible for this treatment.  If you're a "covered expatriate," you must pay income tax on the entire value of the plan, as if you received it in a lump sum.  (Fortunately, no "early distribution" tax applies if you're under age 59 1/2.)

Don't Make a Gift or Bequest to the United States!

You'd think the United States would encourage wealthy foreigners to make payments to persons in the United States.  After all, that money would presumably be spent on U.S. goods and services. 

But if you're a covered expatriate, and you make a gift or bequest to a U.S. person 10, 15, or even 50 years after your expatriation, the recipient must withhold tax at the highest marginal gift or estate tax rate in effect.  The tax on is reduced by the amount of gift or estate tax paid to a foreign country with respect to that gift or bequest.

I suspect this provision will be impossible to enforce years after-the-fact.  Many recipients won't even be aware that they're obligated to pay the tax.  Time will tell!

How to Avoid the Exit Tax

If your net worth is only a little over US$2 million (US$4 million for a married couple expatriating at the same time), the most obvious way to avoid the exit tax is to spend enough money to get your net worth under these thresholds.

Take a trip around the world.  Blow some money in Las Vegas.  Throw a really big party. 

You can also contribute your excess funds to a qualified charity, or give away up to US$1 million over your lifetime to anyone else without triggering a gift tax liability.

If you've paid more than an average of US$139,000 annually for the previous five years, however, this strategy won't work.  And if you don't have sufficient cash to pay the exit tax, your best option may be to elect to defer payment.  You'll pay interest for the period tax is deferred, and you may be required to post a bond with the Treasury Department. 

Fortunately, you can make this election (which is irrevocable) on a property-by-property basis.  For instance, it appears as if you could pay the exit tax on all assets outside your IRA, and defer it for the assets in the IRA. 

If you weren't born in the United States, you have a couple additional options. 

• If you were born with citizenship both in the United States and another country, you may not be subject to the exit tax.  To qualify for this exemption, when you expatriate, you must also be a citizen of another country (and taxed by another country), and not been a U.S. resident for more than 10 years during the 15-year period prior to your expatriation.

• If you're a green card holder, you can opt out of the exit tax.  To do so, you must become resident for tax purposes in a foreign country that has a tax treaty with the United States.  You must also inform the IRS of your intention not to waive the benefits of the tax treaty applicable to that country. 

The bottom line: with the exit tax, Congress has made the most significant change to the anti-expatriation rules since their inception in 1966.  In doing so, it's sent wealthy U.S. citizens and long-term residents a clear message: you're slaves on our plantation.  And if you want to exercise your right to leave, you'll pay dearly for the privilege.

Is expatriation for you?  The decision to give up U.S. citizenship is a serious one.  It requires that you obtain a passport from another country, leave the United States permanently, and set up residence in a suitable jurisdiction.  It's a step you should take only after consulting with your family and professional advisors.  But it's the only way that U.S. citizens and long-term residents can legally eliminate U.S. tax liability.  And it's a tax avoidance option that Congress has now made much more difficult.

Copyright © 2008 by Mark Nestmann

IRS: "137 Pages of Utter Scandal"

Think you can count on the IRS to be "fair" when it comes to determining your tax liability?  Think again.

In an extraordinary decision, the U.S. Tax Court recently ordered the IRS to pay back approximately US$30 million collected in a tax shelter case dating back to the 1980s. 

In doing so, the court declared that the IRS had committed "fraud on the court."  The lawyer representing 100 of the 500 taxpayers affected by the ruling called the decision "137 pages of utter scandal."

That's a pretty accurate depiction, considering the facts.

In the early 1980s, the IRS ruled that an arrangement dubbed the "Kersting tax shelter" was illegal.  It then began making assessments against nearly 2,000 taxpayers.

In proceedings of this type, it's common for the IRS and attorneys representing the taxpayers to agree to present a test case or cases before the Tax Court.  In the Kersting litigation, the IRS and the taxpayers agreed to be bound by the outcome of the cases.

However, two IRS attorneys then did something highly unethical.  They decided to stack the deck in favor of the IRS.  They did so by entering into a secret settlement—not disclosed to the court—with one of the participants in the test cases.  The settlement gave the taxpayer a refund large enough to cover his attorney fees.  Not surprisingly, the taxpayer accepted it with open arms.

The test cases then proceeded to trial, with results much less favorable to the taxpayers.  However, since no one knew of the secret settlement, most of the taxpayers dutifully settled with the IRS.

Shortly thereafter, the scheme began to unravel.  The Tax Court tried to enforce its "official" ruling against the taxpayer involved in the secret settlement.  The taxpayer then testified as to existence of the secret settlement.   

In 2003, a federal appeals court ruled that the IRS attorneys had committed fraud on the court because they neglected to disclose the secret settlement offer to IRS management, opposing counsel, and the court itself.  It declared that everyone who had agreed to be bound by the test cases should instead be provided the same settlement given secretly to one of the participants. 

In the meantime, however, more than 500 taxpayers who settled with the IRS and paid their tax assessments in full before the 2003 ruling.  In 2005, the Tax Court refused to revisit one of those settlements.

On May 1, however, the Tax Court reversed itself.  It declared that these 500 taxpayers should also receive the benefit of the secret settlement. 

There's a lesson here, but it’s not the one you learn in civics class.  The IRS—and indeed, all branches of the U.S. government—fight dirty.  The objective is to win at all costs.

But, once in a while, justice prevails, even if it takes more than 20 years.  Such was the case here.  It's about time.

Copyright © 2008 by Mark Nestmann

Why U.S. Investors are "Public Enemy #1" at Offshore Banks

"It's not you, it's your government."

It was a brilliant autumn day in Vienna.  I was having lunch on the Ringstrasse with a vice-president of one of Austria's leading private banks.  He was explaining why the bank's parent company had made the wrenching decision to stop accepting banking business from U.S. resident investors.

The bottom line, he told me, was that the bank's legal advisors believed that it was too risky to accept further U.S. business.  This was because of the increasing number of U.S. laws and regulation that affected the bank both inside—and out of—the United States:

• The USA PATRIOT Act.  This law permits the U.S. government to confiscate the U.S. assets of foreign banks, without convicting, much less accusing, the bank, or any of its depositors of a crime.
• Qualified intermediary rules.  Imposed by the IRS, these rules impose a draconian 30%-31% withholding tax on both income and gross sales proceeds for U.S. securities owned by foreign banks.  The tax can only be avoided if the foreign banks enter into one-sided qualified intermediary agreements with the IRS to enforce U.S. tax laws.
• Securities laws enforced by the U.S. Securities and Exchange Commission that prohibit the marketing of non-U.S. registered securities to U.S. persons. The SEC has an extraordinarily expansive definition of what constitutes "marketing."  As a result, some offshore banks no longer permit U.S. residents to purchase foreign securities, even if those orders are unsolicited. 

Fortunately, there are several ways to legally avoid these restrictions:

• Have a legal residence outside the United States.  Offshore banks are more willing to accommodate non-resident U.S. citizens than those living in the United States.  If you're a U.S. citizen with a legal residence outside the United States, investment restrictions offshore banks impose on U.S. residents won't apply.  You'll need to prove that you're legally resident offshore; e.g., in the form of an official identity card or residence visa and possibly a driver's license and/or utility bill with a non-U.S. address.
• Conduct transactions in person.  Most offshore banks place fewer restrictions on instructions conveyed by a U.S. resident in a personal visit than those originating in the United States.  You may also be able to arrange that after you leave, certain trades will occur automatically, depending on market conditions.
• Have the portfolio managed by your bank or an independent portfolio manager.  Once you sign a portfolio management mandate, investment instructions will no longer originate in the United States.  Most offshore banks impose fewer investment restrictions on such portfolios.   
• Invest through non-U.S. insurance or annuity policy, or an offshore entity such as an offshore limited liability company.  These contracts and entities often eliminate offshore investment restrictions, but have significant tax and reporting consequences.

There's also one thing you should NOT do when dealing with government-imposed obstacles to offshore investing.  As I discussed last week at The Sovereign Society’s Total Wealth Symposium in Panama, many offshore banks recommend that you open your account in the name of an offshore corporation, with the shares held by an offshore trust or offshore foundation.  This is structure triggers numerous tax "land mines" that I discussed in my presentation.

(You can listen to my presentation—and to all the rest of the experts who appeared at this conference—by following this link.)

Finally: don't let these obstacles prevent you from investing offshore.  As the restrictions tighten, it's more important than ever to get a portion of your wealth out of the United States, away from litigious lawyers, nosy competitors, and SEC investment restrictions.

Copyright © 2008 by Mark Nestmann

Diplomatic Passport Scams Return

A diplomatic passport is the "Nirvana" of international travel.

Once you receive diplomatic status from a recognized government, you'll enjoy the privileges granted diplomats under international treaty.  One of the most significant of these privileges is "diplomatic immunity." 

This policy, agreed to under a 1961 treaty, guarantees accredited diplomats safe passage across international borders without being subject to visa formalities, or (in most cases) a search of their luggage.  Diplomatic immunity also insures that a host country may not subject accredited diplomats to local taxation or prosecution for any crime.  A diplomat may not be sued under the laws of the host country.  What's more, the home or office of a diplomat is inviolate from search or seizure.  (However, diplomats may be expelled from the host country and prosecuted in their "home" nation.)

Why do otherwise bickering nation-states uphold a system in which they cannot prosecute a criminal inside their own borders?  Essentially, it's because they recognize that their own diplomats may need to carry out activities in their official capacity that may violate local law.  They expect other countries to honor their own diplomats' immunity. 

Given the enormous tax, privacy, and legal advantages that diplomatic immunity provides, it's not surprising a cottage industry has developed that claims to provide a "diplomatic passport" in exchange for a fee.  A colleague recently sent me a link to a Web site selling such passports for only US$10,000 each (naturally, from an unnamed country). 

For total immunity from taxation, search, seizure, and prosecution in whatever country you decide to reside in with your diplomatic passport, that price would appear to be the bargain of the century.

Alas, the real story is not so glittering.  No country in the world sells diplomatic status on an official basis.  The only way to obtain a diplomatic passport is to become a diplomat in a country's foreign service.  There are very few shortcuts, and you certainly can't buy diplomatic status for a mere US$10,000, at least not without dealing in lost or stolen documents, or by bribing corrupt officials.

Otherwise, the only way to obtain a passport through an investment—sadly, without diplomatic immunity—is to purchase one from the handful of countries offer "instant" citizenship in return for an economic contribution.  The Commonwealth of Dominica, the Federation of St. Kitts & Nevis, and Austria are the only countries with an official, legally mandated, citizenship-through-investment program.

The Nestmann Group can provide assistance in all three programs, although the Austrian passport is available only after you make a multi-million dollar investment in Austria, and subsequently apply for citizenship.  In Dominica and St. Kitts/Nevis, the costs are much lower, and you incur most of the fees only after your application is provisionally approved. 

For more information on these programs, click here, or send an email to info@nestmann.com.

Copyright © 2008 by Mark Nestmann

Panama Cracks Down on Cash Transactions—is America Next?

One of the hallmarks of Panama's financial system is the country's justifiably famous bank secrecy law. 

But, when it comes to dealing in cash, the laws are very different.  Like the United States, Panama requires that many types of cash transactions—particularly with financial institutions—be reported if they exceed US$10,000.  But as I found out personally, Panamanian law goes much further.

I just returned from Panama, where I spent the last 10 days to take part in The Sovereign Society's just-completed 20th Annual Total Wealth Symposium.  One evening last week, I walked to a grocery store near the hotel where the conference was held.  My intent was to pick up some snacks along with a six-pack of beer to avoid paying the scandalously high charges for these items in my hotel room's mini-bar.

To pay for these items, I pulled out a fifty-dollar bill—fresh from an ATM near the Phoenix airport.  (Panama's circulating currency is the U.S. dollar.)  And that began a very interesting sequence of events.

The young lady who scanned my groceries took the bill, looked me in the eye, and said "Momento, por favor."  My Spanish skills are essentially non-existent, but I realized that some procedure had to be followed in order to accept my cash. 

The clerk then called a supervisor to the checkout counter.  Shortly thereafter, a female supervisor arrived, armed with a thick notebook.  The supervisor, who spoke excellent English, explained that Panamanian law required logging many types of cash transactions paid for with a $50 or $100 bill, with no minimum threshold.

She offered me an opportunity to pay with a smaller bill or a credit card, but I declined, because I wanted to see what would happen next.  This involved recording my passport number, along with the name and address on my driver's license, in the logbook.  Once she copied this information, the clerk gave me my change, and I was free to go.

When I arrived back at the hotel, I took the remainder of my $50s and $100s to the front desk and exchanged it for smaller bills.  I asked the desk clerk about the ID requirements for paying with bills in denominations larger than $20s. 

He told me that this regulation came into effect because of an increase in circulation in counterfeit $50s and $100s.  I had read that narcotics cartels in neighboring Colombia were producing high-quality counterfeits, and surmised that this is one way Panama is dealing with the problem.

My question is: could these same rules come to America?  Time will tell.  But it certainly wouldn't hurt to begin exchanging any $50s and $100s you hold for smaller denominations.

Copyright © 2008 by Mark Nestmann

Welcome to Panama!

Greetings from the Sheraton Hotel and Convention Center in Panama City. I'm here with The Sovereign Society to speak at the 20th Annual Total Wealth Symposium.

My room is directly across the street from a construction zone.  I awoke this morning at 6am to the sound of jackhammers and trucks rumbling outside my window.

In fact, everywhere you look in Panama City, you see cranes, construction, and new development.  My question is, who is going to buy the thousands of new condominiums, apartments and houses that will come on the market in the next year or two. 

It won't be Panamanians...the average Panamanian earns less than US$5,000 annually, according to the World Bank.  That means the vast majority of the new construction must be sold to expatriate investors...Americans, Chinese, European, and the other nationalities now flooding Panama with their investments.

In the past five years, Panamanian real estate prices have climbed more than 200%.  When I first visited Panama in 2000, you could purchase a nice two-bedroom condo with a view of the ocean for $60,000.  Today, you can't touch a simliar unit for much under $200,000, and often much more.

Can the boom be sustained? I'm skeptical, but I'll be spending a day this week with a well-connected local real estate agent to look at some developments both inside Panama City and in the nearby suburbs. 

One thing is for sure.  If the flow of expats into Panama slows down, the thousands of new housing coming on line in the next few years simply won't be sold at current levels.  That means Panama could potentially experience the kind of real estate slowdown now being experienced in the United States.

Time will tell...

Copyright© 2008 by Mark Nestmann

Is Anything a Secret in the UK?

No, I don't have anything against the United Kingdom.  And I realize that only last week I wrote about how local authorities are using anti-terrorism laws to prosecute dog owners for not cleaning up dog poop.  But a new initiative from the U.K. Office for National Statistics (ONS) takes the proverbial cake.

The intrepid bureaucrats at the ONS have devised a new sex survey.  They're fanning out across the United Kingdom to make random visits to over 200,000 homes.  The survey has 2,000 questions about your sex life.  (No, that's not a misprint.)

Among other minutiae, the government wants to know who you have sex with, what toys you use while you have sex, if you insert any devices into your body cavities during sex, and details of your past sexual relationships.  The cost of this survey comes to a little under US$7 million annually.

And the benefits?  Well, the ONS will be able to release revealing snapshots of British sexual practices, such as this one from the ONS press release that revealed that one in eight women between the ages of 16 and 50 and one in six men under 70 had not had sex in the past year.

Once you answer the 2,000-question survey, there won't be much if anything private in your life if you live in the United Kingdom.  The government knows you name, your address, where you work, your phone numbers, your national insurance number, and your bank account numbers.  It also has the details of your mortgage, credit rating, car registration, and any arrests and convictions you have on file.  Through a nationwide network of closed circuit cameras, officials can follow you pretty much anywhere you go.

And now, thanks to this survey, that includes your bedroom. 

Can the Brits top this?  I don't see how—but I'll be watching, too.  Not your bedroom, but for evidence of the next taxpayer-financed boondoggle.

Copyright © 2008 by Mark Nestmann

A Moment of Panic

I pride myself on being prepared for just about anything when it comes to my laptop PC.  I've successfully my data after dropping it on a concrete floor, shorting out the keyboard, and corrupting the hard drive.

But this morning, I came close to panic.  OK, it was panic, although only for a moment.

Yesterday evening, I installed the newest version of PGP Desktop, the flagship personal encryption product from PGP (http://www.pgp.com).  (The PGP line of encryption products originated in the work of legendary programmer Phil Zimmerman, who almost went to jail in the mid-1990s for creating an encryption product the U.S. government couldn't break.)

Everything went smoothly.  After installing the program, I began what PGP calls "Whole Disk Encryption."  That means that the laptop will start up only after you enter the correct PGP "passphrase" into a dialog box. 

No problem there.  I created a passphrase that was easy for me to remember, and hopefully, hard for anyone else to guess.  Then I did something you're not supposed to do—I wrote down the passphrase on a piece of paper in case I forgot it.  My intention was to shred that piece of paper this morning, after making certain that I had memorized the passphrase.

This morning, after a mug of the overly-strong coffee I'm so fond of, I sat down at the laptop and turned it on.  As I expected, the PGP dialog box appeared and asked me for the passphrase.  I entered it, but the program told me I had entered in an incorrect passphrase.

That's when the moment of panic set in.  I typed every conceivable variation of the passphrase I could think of, at least 30 in all.  None of them unlocked my laptop. 

I knew from reading the PGP user guide that if I couldn’t recall the exact passphrase, the only choice I would have would be to reformat my entire hard drive.  S**t!!!!

And remember that piece of paper?  Apparently, the passphrase I wrote on it wasn't the one I actually used to encrypt the hard disk.  Double s**t! 

What to do?  The only alternative was to keep trying different passphrases until one opened up the disk.  Then I remembered that I had considered—and I thought rejected—a slightly shorter passphrase than the one I actually used to encrypt the hard drive.  Could I have mistakenly used that one?

I entered that combination of letters, numbers, and symbols on the keyboard and briefly held my breath.  The hard drive opened up normally, and I was back in business.

The moral of this story, of course, is do as I say, not as I do, to wit: DON'T FORGET YOUR PASSPHRASE!! 
And of course, don't panic, unless there's a very good reason. 

Copyright © by Mark Nestmann

Bermuda's Squeaky-Clean Image Smeared in Scandals

Bermuda, perhaps more than any other offshore center, has for decades sought to create for itself a reputation as a "respectable" offshore financial center. 

Unlike many competing jurisdictions, Bermuda never enacted a bank secrecy law.  It eschewed the idea of "asset protection trusts," basing its trust legislation on the time-tested provisions of English law, rather than the debtor-friendly legislation of offshore centers like the Cook Islands.  Professional and government fees for offshore services and structures were and continue to be significantly higher than most other jurisdictions. 

Bermuda also remained a British overseas territory, rather than opting for independence.   This provided assurance that British regulators, at least in theory, were overseeing Bermuda's offshore financial industry.

If it were only true.  Events in the last year have exposed corruption and money laundering on an immense scale.  Last month, the head of Britain's Committee of Public Accounts, Edward Leigh, called Bermuda's record "appalling." 

It's not hard to see why:

• In April 2007, authorities in the British Virgin Islands brought criminal charges against IPOC International Growth Fund, Ltd., a Bermuda-registered mutual fund.  The BVI accused IPOC of laundering money for a powerful Russian politician through the Bermuda Commercial Bank, one of Bermuda's largest and most respected banks. 
• In December 2007, the U.S. Securities and Exchange Commission brought securities fraud charges against Lines Overseas Management, headquartered in Bermuda.  LOM stands accused of receiving at least US$5.8 million from two stock manipulation schemes. 
• In August 2007, a local Bermuda newspaper reported that the prime minister, while serving in another ministry, obtained US$150,000 of publicly funded renovation on his home.  In connection with an alleged press leak, police arrested and detained the island's Auditor-General, whose responsibility is to oversee the government's financial affairs.

As a U.K overseas territory, Bermuda is subject to the dictates of the U.K. Parliament and the U.K. Foreign Office.  However, the U.K. authorities have generally not interfered in its offshore sector, as they have historically considered Bermuda to be a well-regulated jurisdiction.  For instance, while most other U.K. overseas territories are subject to the EU Savings Tax Directive, it wasn't extended to Bermuda.

That may now be changing, thanks to the ongoing series of scandals now rocking Bermuda.  I predict a much heavier regulatory hand being extended from the United Kingdom to Bermuda. 

However, there's little doubt that Bermuda's ueber-successful captive insurance, investment fund, and trust management sectors will continue to thrive.  Bermuda's financial infrastructure is also well developed, including numerous international law and accounting firms.

So, don't count Bermuda out of the offshore arena.  But the bloom is definitely off the rose.

Copyright © 2008 by Mark Nestmann

Feds to U.S. Border-Crossers: We Own Your Laptop

It's bad enough that when you cross a U.S. border, you must consent to an intrusive search of your luggage.  But now, courtesy of a decision from a federal appeals court, the government also has the right to copy everything on your laptop—and use it for whatever purpose it seems fit.

I wrote about an earlier decision along these lines over a year ago.  (Click here to read the posting).   As I wrote then, the ways that this new authority can be misused are too numerous to count—whatever information you carry with you on your laptop—banking records, client data, “adult” videos, you name it—now, in effect, must be shared with the U.S. government.

But now it's even worse: the 9th Circuit Court of Appeals has ruled that customs officials don't even need "reasonable suspicion" (much less "probable cause") to "search a laptop or other personal electronic storage devices at the border."  That means in addition to your laptop, customs officials can search and copy data from your cell phone, Blackberry or any other electronic device without any evidence you've done anything wrong.

A search of a laptop is far more intrusive than a search of your luggage.  In some ways, it's even more intrusive than a body cavity search, which customs officials do require "reasonable suspicion" to conduct. 

Your body cavities may (or more likely may not) reveal any contraband.  But examining the data on your laptop may well reveal a detailed picture of your friends, your family, your professional associates, your interests, your financial status, and possibly much more.  As one attorney noted, "It really is like looking into someone's mind, rather than looking into a box or a folder or a purse."

One way to protect yourself from this type of intrusion is to encrypt all the data on your laptop, or even the hard disk itself, using a program like PGP Desktop (http://www.pgp.com). 

Unfortunately, that may not be an ideal solution, because customs officials may demand that you decrypt any encrypted files before they return your laptop.  If you refuse, they can confiscate the laptop and/or detain you until you agree to provide access to the unencrypted files.

A better solution may be to copy all the data on your laptop to a USB stick and send it via a courier service to your international destination.  Encrypt the data, of course, before you send it.  Then securely "wipe" any confidential information off your hard drive, along with the "free space," again using a program like PGP Desktop. 

If you carry your laptop through Customs, be sure to "sanitize" it.  First, encrypt and copy your data to a USB stick, then send it via courier to your destination.  Then, use a utility like Killdisk (http://www.killdisk.com) to securely wipe everything on your hard drive.  Then reinstall the operating system according to the instructions in Killdisk or whatever utility you use for this purpose.  (There are other possible “sanitation” solutions but none as good as this one.) 

If Customs asks you to inspect your laptop, let them.  The inspector won’t find anything but the operating system and standard system files.

(For more suggestions on protecting your privacy and wealth, click here.)

Copyright © 2008 by Mark Nestmann