Asset Protection BLOG - Mark Nestmann

Clever Credit Card Scam Preys on Unwary

There's yet another credit card scam making the rounds.  It's slick because the scammers already have 95% of what they need to rip you off.  They're depending on you to provide the other 5%. 

Here's how it works: your phone rings and you pick it up.

Caller: "This is John Doe from the Anti-Fraud Department at VISA International.  My badge number is 864890.  Your card has been flagged for an unusual purchase pattern, and I'm calling to verify that you authorized this transaction.  The card number is 5555-555-555-5555 and was issued by Citibank.  Did you purchase a Sony DVD player for $497.23 from Advanced Marketing Concepts of Denver on June 14?"

 You: "That's the correct card number, but I did not authorize any such purchase."

Caller: "OK, we will be issuing a credit to your account.  Advanced Marketing is a company we have been watching and the charges are always just under the $500, the purchase amount that we flag for further investigation.  Before you receive your next statement, we'll issue the credit.  Please let me confirm your billing address: is it 123 Easy Street in Sucker, South Dakota? "

You:  "Thank you for catching this.  Yes, that is my billing address." 

Caller: "You're welcome, that's what we're here for.  By the way, we'll be starting a fraud investigation right away.  If you have any questions, you should call the toll-free number on the   back of your card and ask for the Anti-Fraud Department.  Please refer to this Control Number: XPJ395.  That's XPJ395.  Do you need me to read it again?'

You: "Yes, I wrote that down, thank you."

Caller:  "OK, we're almost finished.  I need to have you verify that you are in possession of your card.  Do you have it in front of you?"

You:  "Yes, I have it here."

Caller: "Please turn your card over and look for some numbers.  There are seven numbers.  The first four are part of your card number, and the next three are the security numbers that verify you possess the card and that it has not been lost or stolen.  Would you please read me those three numbers?"

You: "Yes, the numbers are 578."

Caller: "That is correct.  OK, that's all—do you have any other questions?"

You: "No, thank you again for catching this fraud."

Caller: "You're very welcome.  You can never be too careful."

That's how the scam works: after confirming information the caller has received from stolen or hacked credit card databases, you're persuaded to part with your security code.  This is the one piece of information needed to make a fraudulent purchase on most Web sites. 

You say very little, and the caller never asks you for your name, address, or card number.  That's because the caller already has that information.  But armed with the security code, the caller can then proceed to make virtually untraceable unauthorized purchases over the Internet.

If you receive a call like this, do NOT give the caller the security code on the back of the card.  If it's truly the anti-fraud department calling, they will already have all the information they need, including your security code.  After all, they issued your card!

Copyright © 2008 by Mark Nestmann

Don't be the Next Victim in the "Lawsuit Lottery"

A friend and colleague—and a very successful trial lawyer—assures me that he's never filed a frivolous lawsuit. Even if that's true, many of his colleagues aren't nearly as judicious in the legal claims they file. 

One study estimates that 50,000 new lawsuits are filed every day in U.S. state and federal courts.  At that rate, the odds are that every person in the United States will be sued sometime in the next 16 1/2 years!

Why the U.S.A. Leads the World in Lawsuits

There are many reasons why the United States is the world leader when it comes to lawsuits. 

In most countries, if someone wants to sue someone else, they have to pay a lawyer to do so.  That sounds like a reasonable proposition, but in the United States, lawyers can take cases on "contingency."  That means the attorney receives no fee unless money is recovered from the defendant.  As a result, there's nothing to prevent someone with a chip on their shoulder from suing you, even if they don't have the money to hire an attorney.  It also means trial are constantly searching for "deep pocket" defendants.

If that's not bad enough, numerous Web sites promise to make it easier to file lawsuits.  For instance, www.sueeasy.com pairs trial lawyers and potential litigants, promising to let you "take the first step towards resolving grievances, ONLINE!"  To encourage even more lawsuits, investors have formed companies to finance lawsuits by buying a share of the settlement.  When I searched on Google today under the term "lawsuit funding," I received an amazing 159,000 hits.

Another reason lawsuits are so prevalent is an avalanche of laws from Washington, D.C. inviting people to file lawsuits in U.S. courts.  For instance, just a few months ago, President Bush signed a bill amending an obscure law called the “Foreign Sovereign Immunities Act.  The bill makes it easier for terrorist victims to recover civil damages.  But it's also launched an orgy of lawsuits against U.S. companies that never had anything to do with terrorism.  Other federal laws that encourage individuals to file lawsuits include the Americans with Disabilities Act, the Racketeering in Corrupt Organizations Act (RICO), and many others.

No More Frivolous Lawsuits?

Some people collect stamps, coins, or antique furniture.  My collecting habits are somewhat more esoteric: I collect stories of frivolous lawsuits.  Here are a few of the more outrageous examples that recently crossed my desk:

Group claims allergy to wi-fi signals. A group of "electro-sensitive" individuals in Santa Fe, New Mexico, says they're allergic to wireless Internet signals.  And they're suing the city for discrimination under the Americans with Disabilities Act.  The group wants the city to disband all wi-fi devices in public buildings.

"Chaperone" sued for wrongful death.  Have you ever accompanied your child on a school trip?  If you have, and someone else gets hurt, you might be sued for failing to act as a "responsible party."  That's what happened to Susanne Sadler, who accompanied her cheerleader daughter on a trip to the 2004 Hula Bowl.  Trouble is, another cheerleader on the same trip did a little too much partying and plunged naked to her death from a ninth-floor hotel.  Sadler claims that she never agreed to chaperone anyone.  Nonetheless, the parents of the dead cheerleader sued her, and an arbitrator awarded the parents US$690,000.

Packaging company sued for unintended use of product.  In 2003, fire raced through the Rhode Island Station nightclub, killing 100 people.  A company called Sealed Air is now on the hook for US$25 million because the nightclub owner used polyethylene foam for soundproofing, allegedly making the fire spread more quickly.  There's no evidence that the owner used Sealed Air's polyethylene foam for soundproofing.  Nor is there any evidence that the company ever promoted its foam for this purpose.  Nonetheless, under Rhode Island's "joint and several liability" law, if Sealed Air were found to be even 1% liable for the fire, it would have to pay the full amount of a possible multi-billion-dollar claim.  To avoid that possibility, Sealed Air will pay US$25 million in what amounts to protection money.

Bar responsible for safety of customers who don't consume alcohol.  "Dram shop laws" in all 50 states require bartenders to refrain from serving alcohol to obviously intoxicated patrons.  In New Jersey, however, a court has gone even further.  It ruled that a bar owner may be sued for negligence because he did not try to protect a patron who purchased only soft drinks at the bar.  In this case, the owner was sued for failing to prevent the non-drinking patron from getting into a vehicle driven by another person who was visibly intoxicated.  The passenger died in a subsequent accident.  There's no reason to believe that a non-drinking guest in your own home wouldn't be covered by the same legal logic.

In every one of these cases, trial lawyers sued a "deep pocket" defendant or forced a settlement on the threat of even a larger financial exposure.  Could you be next? 

It's hard to say.  But if you're wealthy, you're a prime target, especially if you display your wealth openly.  In addition, professionals—doctors, lawyers, engineers, etc. —are frequent targets.  Disputes among relatives also often lead to unwanted litigation, particularly after the death of a wealthy family member.

Six Ways to Protect Your Wealth and Privacy from Stupid Lawsuits

1. Purchase liability insurance for your home, your business and your vehicles. Don't stop at the minimum limits, either.  If you can purchase an "umbrella" policy with limits of US$1 million or more, do so.

However, liability insurance won't cover against intentional "torts," such as libel, slander, or harassment.  This also doesn't cover punitive damages, or damages or injuries resulting from your violation of any law or regulation. 

2.  Avoid personal guarantees. Recently, I met someone who signed a personal guarantee for a loan on a "can't miss" investment.  The problem was that he signed it a few weeks before the Sept. 11 terrorist attacks.  After the attacks, the value of the investment collapsed and he was left holding the bag.  Seven years later, he's still on the hook for the loan, to the tune of over US$1 million. 

3.  Max out pension and retirement plans. Federal bankruptcy law prevents creditors from seizing most pensions, retirement plans, Social Security, and other benefits tied to age, illness, or disability.  In some cases, this protection exists only if you declare bankruptcy—which you may not want to do.  However, there's no limit on the amount that can be protected from bankruptcy in retirement funds, except that amounts accumulated in IRAs are limited to US$1 million.

4.  Keep a low profile. Keep your wealth where it's not visible; don't flaunt it.  For instance, never drive a trophy car—drive a middle-class vehicle instead.  And if you own your own home, make sure it's in a middle-class area, not in the most expensive part of town.  If you crave luxury, spend your money on the inside—on furnishings, electronics, etc.—where it's less visible.

5. Use business entities—especially limited liability companies—to hold title to your assets, unless doing so would result in a higher tax bill.  LLCs aren't asset protection panaceas, but are far more resilient against lawsuits than holdings in your own name.  SIngle-member LLCs, however, aren't nearly as effective for asset protection as if there are multiple owners.

6.  Move "nest egg" assets outside the United States into offshore jurisdictions that are serious about asset protection. The kind of frivolous lawsuits we take for granted in the USA simply aren't tolerated in countries like Switzerland, Nevis, Panama, and many other offshore centers.

Even with these precautions, you may not be immune from attacks by American trial lawyers.  But you will have come a long way in the right direction!

Copyright © 2008 by Mark Nestmann

"Unpatched" PCs are Toast When Hackers Discover this Vulnerability

With apologies to Shakespeare, "There's something rotten in the Internet."

It has nothing to do with online scams, child porn, or any of the other evils infesting the Internet.  Instead, it's a recently discovered and fundamental vulnerability that will shake the very foundation of e-commerce. 

I learned of this vulnerability through a series of e-mails last week with a network security engineer.  Without getting overly technical, what he told me is that there is a problem in the system that facilitates the interconnection of computers on the Internet. 

Consider the following:

1. Every computer on the Internet has a name (e.g. www.yahoo.com, www.google.com, etc.  Even your home computer has a name. 

2. Every one of these names also has a (behind the scenes) numerical equivalent called an "Internet Protocol Address," or IP address for short.  For instance, www.nestmann.com has an IP address of 205.134.240.228. 

3. Computers on the Internet use this numerical equivalent to route and interconnect online traffic.  The name corresponding to the numbers exists only to make it easier for humans to remember how to connect to a particular Web site.

4. The system that translates all of these names to IP Addresses is called the Domain Name System (or DNS).

In any event, the basic gist of the vulnerability allows an attacker (either a human or a computer virus or similar "malware") to easily "spoof" DNS servers with incorrect IP addresses.  This in turn presents a range of possible outcomes. 

Imagine if one or both of the following scenarios became a reality:

1. Imagine that if someone could, with very little technical knowledge, spoof the DNS and change the address of www.ameritrade.com (or any other Web site) to that of another Web site under the attacker's control.  That person could harvest login names and passwords, then go to the real Ameritrade Web site and attempt to transfer funds to an account under the attacker's control.

2. Imagine an even more sinister scenario where the motivation is not theft, but shutting down e-commerce, both on and off the Internet.  You're in Wal-Mart trying to pay for your purchase with a credit card or debit card, but the transaction won't go through.  The point-of-sale computers are online and functioning, the network is properly connected, but all transactions are declined.  Since the world—particularly wealthy countries such as the United States—has moved to a cashless society, this scenario could literally shut down the economy in these countries.

This vulnerability has been kept under wraps because the various stakeholders (including the government) don't want it publicized until they have crafted a solution to it.  Microsoft and other e-commerce vendors are frantically working to create patches to deal with it.  However, the vulnerability is not vendor-specific; it exists in the DNS itself. 

On August 8, one of the researchers who discovered the vulnerability will reveal it at a convention of computer hackers in Las Vegas.  You can expect attacks on the DNS to begin within a few hours of his presentation, perhaps even sooner. 

In the meantime, what can you do to protect yourself?  First, keep enough cash at home to deal with the possibility of not being able to use ATMs, debit cards, credit cards, etc. for an extended period.  Second, make sure your own PCs are fully "patched" with the latest security upgrades.  If you use Microsoft XP or Vista, you can automatically download patches to your PC as they're created.  Or, go to
http://windowsupdate.microsoft.com and download the latest patches.

(Many thanks to Jay Ward for bringing this vulnerability to my attention and explaining it in non-technical terms.)

Copyright © 2008 by Mark Nestmann

Warrantless Eavesdropping: Goodbye, Fourth Amendment

The Fourth Amendment to the U.S. Constitution reads:

"The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized."

Contrast this language with the terms of the recent "compromise" legislation governing warrantless surveillance of Americans' electronic communications that Congress is set to approve.  The bill amending the Foreign Intelligence Surveillance Act (FISA) gives the U.S. National Security Agency—the world's largest intelligence agency—carte blanche to engage in wholesale "data mining" of e-mail communications, telephone calls, faxes, etc.  And there's absolutely no requirement that the government describe "the place to be searched, and the persons or things to be seized."

Instead, the NSA's "Terrorist Surveillance Program" (TSP) appears to rely on mining the data streams of U.S. telecommunications companies to analyze transactional records of telephone and e-mail traffic in search of patterns that might point to terrorist suspects.  In other words, are you—or anyone else in the United States—acting in a way that merits eavesdropping? 

If you match one of these profiles, the NSA apparently assigns a human analyst to listen in on your telephone calls and read your e-mail.  Again, there's no warrant required.  This apparently happens tens of thousands of times annually.  Most of the time, the NSA doesn't find anything suspicious.  Perhaps a few thousand times each year, the NSA passes on information to domestic law enforcement agencies, but most of inquiries drop out due to lack of evidence.  Only a handful of inquiries—fewer than 10 annually—merit a full investigation. 

What about a warrant backed by probable cause?  Apparently, only in those 10 or so cases that merit a full investigation does the FBI obtain a search warrant or domestic wiretap warrant. 

The only role of the courts under the new FISA law is to approve the computer algorithms the NSA uses to decide which messages merit further investigation.  That decision is in the hands of the secret court set up 30 years ago to oversee wiretaps in national security investigations.  In its 30-year history, this "Foreign Intelligence Surveillance Court" has turned down only a handful of NSA surveillance requests.  But now, its role will simply be to rubber-stamp the explanation by a NSA technician of what a particular algorithm purportedly accomplishes. 

Nor is there any assurance that the program is limited to terrorist investigations.  There's an obvious potential for politically motivated surveillance here.  Already, evidence has emerged that the government uses the TSP to fight drug smuggling. 

What stops the NSA from using this authority, e.g., to snoop on political opponents of the ruling party?  Only judges technically savvy enough to really understand the mathematical underpinnings of the NSA algorithms they're asked to approve.  How many judges do you think have the technical background to do that? 

The remainder of the law is a joke, although I'm not laughing.  It grants retroactive immunity to the telecom companies that cooperated with NSA eavesdropping after the attacks of Sept. 11, 2001.  It also stipulates that the government must use FISA and the criminal wiretap laws as the exclusive means to conduct electronic surveillance.  Of course, this is the provision of the FISA law that President George W. Bush unilaterally decided to ignore when he approved the original Terrorist Surveillance Program shortly after Sept. 11, 2001. 

The bottom line: the FISA amendments shift the decisions about which U.S. citizens to spy on from the courts to virtual priesthood of NSA technicians operating in secret and creating surveillance algorithms that only they understand.   

It's hardly an oversight to state that this type of wholesale surveillance makes the Fourth Amendment a quaint anachronism. 

Goodbye, Fourth Amendment.

Copyright © 2008 by Mark Nestmann

"Exit Tax" Becomes Law

America now has officially joined the ranks of Nazi Germany and Stalinist Russia by enacting its first-ever "exit tax."  President George W. Bush signed the legislation--passed unanimously last month by both the House and Senate--into law yesterday, June 17.

You must pay the exit tax within 90 days of "expatriation"--giving up your U.S. citizenship or (in some cases) long term residence in the United States.  Only a few hundred people do this each year, but Congress didn't like the fact that severing all ties to the United States allows wealthy people to legally avoid all U.S. tax.  For my take on the exit tax, click here and here.

The news isn't all bad, though, particularly if you're not wealthy enough to trigger the tax.  In that case, you can bypass some of the complexities and hassles of the law the exit tax replaced.  If you are wealthy enough to trigger the tax, though, the new law will definitely make life more difficult if you ever decide you want to take the only legal path to permanently end all U.S. tax obligations.

Is expatriation for you? It's not a step for the faint of heart, but if you're seriously interested in this option, my company can help.  Contact me at info@nestmann.com for more information.

I'm also updating my Billionaire's Loophole report (sold in the bookstore on www.nestmann.com. The new version will contain a detailed analysis of the new exit tax law and contain numerous suggestions for legally avoiding it. If you'd like to be informed via e-mail when the updated report is available, please sign up for my mailing list here.

Copyright (c) 2008 by Mark Nestmann

Is Your Safety Deposit Box a Crime Scene?

For many years, I've advocated keeping valuable items in private vaults, rather than safety deposit boxes.  A raid June 2 on three private vaults in London has led me to change my mind. 

In a meticulously orchestrated operation, more than 300 heavily armed police simultaneously raided the vaults, all owned by Safe Deposit Centres Ltd.  Subsequently, police arrested two of the South-African born owners of the company on suspicion of money laundering and related charges.

In the most unprecedented example of wholesale confiscation I can recall in a "civilized" country, U.K. police seized every one of the more than 7,000 safety deposit boxes in the vaults.  According to a spokesman from the London police, “Each box will be treated as a crime scene in its own right.”

The raid made headlines throughout Britain, and continues to do so, as police selectively reveal what they've found inside the boxes. The bounty—which will be forfeited to the Crown unless the owners mount a successful action to reclaim their property—includes the equivalent of US$100 million in cash, six suitcases full of gold dust, along with an assortment of drugs, guns, and child pornography.

Police claim that 90% of the boxes contain criminal assets.  Indeed, police have linked the box-holders to organized crime syndicates dealing in drugs, child pornography, human trafficking, prostitution, and the catchall crime of money laundering. 

That's quite an assortment of criminality.  But step back for a moment and consider your own safety deposit box or a private vault.  At least in the United Kingdom, police believe there's a 90% probability that it contains "criminal assets."  They have the right to seize the contents of your box, then make you prove that everything you keep there is not "criminal assets" in order to get it back. 

Let's assume for a moment that police decide to raid the bank or private vault where you keep your valuables, and seize the contents of your box.  How would you prove that everything you have in your box is legitimate?

First, you can forget about any currency you keep in it.  In the London raids, police used sniffer dogs to identify drug residues on currency.  Tainted currency is presumed to represent the proceeds of drug trafficking.  It doesn't matter that drug residues taint more than 95% of circulating currency. 

Second, you can probably forget about any gold or other precious metals you keep in it.  If you can produce an invoice that police can tie to a specific bar or coin, you might get that specific item back.  But, if you've simply stored away gold coins that you purchased with cash, without an invoice, you're  out of luck. 

You might fare better with any jewelry you keep in the box.  Naturally, you'll need to produce the original invoice, with sufficient detail on it to identify a specific piece of jewelry or precious stone.  Otherwise, it now belongs to the government.

Don't forget the taxman.  If there's even a scintilla of evidence that you purchased valuables found in your box with untaxed funds, you can probably kiss them goodbye.  And, you can look forward to a tax investigation. 

If you keep important papers in your safety deposit box, police and tax authorities will copy them before you receive them back.  If those papers show evidence of anything illegal—or untaxed income—once again, you can look forward to an investigation.

My recommendation is to close out any safekeeping relationship you have with a bank or private vault, anywhere in the world.  The London raids demonstrate that as soon as you deposit property there, you've essentially given up all legal rights to it. 

Remove your valuables and store them in a floor safe in your home.  If the vault is in a foreign country, and it's not practical to relocate your valuables to your home, make certain that you can prove beyond a reasonable doubt that you legally own every item in the box.  You should have a receipt describing the property in detail, along with a record of how you paid for it.  Ideally, you should also have records proving that you used legally-earned, after-tax funds to pay for the items in the box.

Don't delay.  The "success" of the London operation, and the fawning media attention accompanying it, will surely spur similar efforts in other countries.  Time is not on your side.

Copyright © 2008 by Mark Nestmann

The IRS and its Sneaky International Tax Tricks

Recent high-profile prosecutions of wealthy tax evaders have made headlines worldwide.  What isn't well known, though, are the new ways tax authorities obtain financial data to unearth tax evasion. 

The recent indictment of former UBS banker Brad Birkenfeld in a Florida district court is a case in point.  In 2001, UBS entered into a "Qualified Intermediary" (QI) agreement with the IRS.  Under this agreement, UBS agreed to have its customers fill out IRS Forms W-8BEN, which identify foreign beneficial owners of bank accounts, and IRS Forms W-9, which identify U.S. beneficial owners of bank accounts. 

UBS—and the hundreds of other offshore banks—that signed QI agreements didn't exactly do so voluntarily.  Failing to do so would essentially cut the bank off from the U.S. securities markets.  That's because without a QI agreement, UBS and other foreign banks are subject to a draconian 31% withholding tax on any income or gross sales proceeds from U.S. securities they hold on behalf of their clients.  The only way to avoid the 31% tax is to sign the QI agreement. 

In the Birkenfeld case, the IRS claimed that Birkenfeld and others participated in a "scheme to defraud" the IRS by failing to comply with the terms of the QI agreement.  Now, Birkenfeld has pleaded guilty in order to avoid a stiff prison sentence—and is reportedly prepared to testify his wealthy U.S. clients.

QI agreements are just one of the many tools the IRS and other national tax authorities use to ferret out tax evasion.  Others include expanded information-sharing provisions of tax treaties, a special kind of  treaty called a "Tax Information Exchange Agreement," and even paying multi-million-dollar bribes to bank employees to disclose account data. 

Under this new spirit of cooperation, earlier this year, German authorities paid a former employee of a Liechtenstein bank five million euros for account data on over 4,500 depositors.  Then, they shared the data with investigators in Australia, Canada, France, Italy, New Zealand, Sweden, the United Kingdom, and the United States.  More than 100 U.S. clients of this bank are now under investigation for tax evasion.  And reportedly, a number of bankers from other countries have approached the German tax authorities offering information on depositors in exchange for a generous payoff.   

If you think a U.S. court might throw out evidence against a taxpayer obtained through bribery, think again.  Nearly 30 years ago, the U.S. Supreme Court upheld a tax evasion prosecution made possible only through the theft of a Bahamian banker's briefcase.  Essentially, in tax evasion prosecutions, it's "anything goes."

For U.S. taxpayers, the only saving grace is that if you admit wrongdoing to the IRS before an investigation begins, you can usually avoid criminal prosecution.  But you'll remain subject to all back taxes, interest, and (in many cases) civil penalties.

One think is certain.  Efforts to discover unreported offshore income will only intensify in the future.  If you're an American with unreported offshore income or accounts, my advice is to "come clean" with the IRS.  Otherwise, the IRS just might clean out your finances, and imprison you to boot.

Copyright © 2008 by Mark Nestmann

Exit Tax, Redux

In a recent post, I wrote that the exit tax legislation recently passed by both houses of Congress (and now sent to President Bush for his signature) made U.S. citizens "slaves on the plantation."

Perhaps I overstated my point.  In most respects, the new law actually makes it easier for many U.S. citizens and long-term permanent residents to sever all tax obligations to the U.S. government, forever.  It also makes it relatively simple for persons who became U.S. citizens through an accident of birth (e.g., by having a U.S. parent or being born on U.S. soil) to end their U.S. tax obligations.

So long as you don't have unrealized capital gains over US$600,000 (including gains in most types of pension and retirement plans), this process of "expatriation" is now much simpler than under previous law.  Essentially, all you need to do is to:

• Obtain passport and residence in another country or countries;
• Appear before a U.S. consular officer to swear an oath of renunciation or relinquishment of U.S. citizenship; and
• File a relatively simple form with the to let it know you're no longer a U.S. citizen.

The procedure differs slightly for long-term residents than for U.S. citizens.  And, if you're a long-term resident who is not  a U.S. citizen, you can actually "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.

This process is much easier than dealing with the previous law, which imposed an "alternative tax regime" for 10 years after a person deemed "tax motivated" gave up citizenship or long-term residence.

However, if you're a U.S. citizen with unrealized gains over US$600,000, and you don't want to sell those assets and pay the tax on them before you expatriate, the exit tax truly is onerous.  Its provisions on unrealized gains in retirement plans are particularly unfair.  But for anyone else who might wish to expatriate, the new provisions are a breath of fresh air in the sordid 40-year history of anti-expatriation legislation. 

One thing is certain.  The anti-expatriation laws are unlikely to become any more lenient in the future.  Moreover, capital gains taxes are almost certain to increase in an Obama administration.  That means exit tax on gains—realized or not—will go up as well.

The clock is ticking for would-be expatriates.  If you're seriously considering expatriation, now is probably the best time to begin your planning. 

Copyright © 2008 by Mark Nestmann

It's Time to Bare Your Soul to the U.S. Treasury

It's that time of year again where almost every American with a "foreign account" must "tell all" to the U.S. Treasury Department. 

If you have a foreign account or accounts with an aggregate value of US$10,000 or more (NOT per account), you must file Form TD F 90.22-1 by June 30.  You must also declare that you have a foreign account or accounts on Schedule B of your personal tax return.  (Click here for the link to the form.)

Prosecutions for failing to report foreign accounts have risen sharply in recent years.  If you "willfully" fail to file the form, or acknowledge your account(s) on Schedule B, you face a fine up to US$500,000 and a five-year prison sentence.  Being convicted of manslaughter is likely to result in a shorter prison sentence then willfully failing to file the TD F form!

If you negligently fail to file the form, you're subject to a civil penalty of US$10,000.  And that's for each year you fail to file the form, going back at least to 2004, when Congress imposed the civil penalty provision.

According to Treasury regulations, a "foreign account" isn't merely a foreign bank account, but numerous other types of offshore relationships.  You must report a "financial interest in or signature authority, or other authority over any financial accounts, including bank, securities or other types of financial accounts in a foreign country."

For instance, if you've formed a foreign corporation, but have someone else operate its foreign account on your behalf, you still must file the TD F form, because you have a "financial interest" in the account.  Also, if you have a debit card connected to a foreign account, and you can use the debit card to withdraw money from it, you clearly have "other authority" over the account. 

Some IRS agents even claim that a foreign annuity or life insurance policy represents a financial account, even though there are no specific Treasury regulations in this regard.  I've always recommended reporting these contracts as "foreign accounts," although plenty of advisors disagree with me.  But I'd rather be safe than sorry.

What about "electronic gold" accounts?  Again, there are no specific regulations saying you need to report them.  But my recommendation is to disclose them as well, if only to head off an investigation by an over-zealous IRS agent. 

Fortunately, a few items appear to be non-reportable:

• Real estate.  Direct ownership of real property (including timeshare arrangements) in a foreign country doesn't constitute a foreign account.  But you're required to report income from your real estate holdings, wherever they're located.
• Safekeeping arrangements.  Valuables purchased outside the United States and placed directly into a non-U.S. private vault don't appear to trigger the reporting requirements.
• Warehouse receipts and similar instruments.  Certificates that represent ownership of a specified quantity of precious metals or other commodity, stored outside the United States, may not be reportable.  A certificate should provide for "allocated" or "non-fungible" storage to qualify.  This means you own specific barrels, bars, coins, etc. that are stored in your name and not available to meet other claims of the warehouse company.  Commodities held in non-allocated, pooled, or fungible form may be reportable.

I realize the TD F form is a "tell all" form that you'd probably rather not file.  However, my advice is to file it even in borderline situations, since the consequences of NOT filing are severe, should you get caught. 

Copyright © 2008 by Mark Nestmann

Finally: Some Common Sense on Money Laundering

For more than 20 years, I've opposed the criminalization of "money laundering" on philosophical grounds.

Money laundering laws are dangerous because laundering is not a crime like murder, robbery, or rape, where the evil act is clear. 

Instead, money laundering is a crime of motive rather than activity.  Two different people can engage in the exact same set of activities, and one can be guilty of money laundering while the other is not. 

Money laundering is commonly defined as taking ill-gotten gains and moving them through a sequence of transactions so they ultimately look like legitimate profits from legal business.  Yet, this is exactly what all of do everyday in our own bank accounts with our hopefully legitimate gains. 

That's bad enough.  But since the enactment of the first money laundering law in 1986, the U.S. government has expanded its use to the point where prosecutors can add money-laundering charges to virtually any prosecution involving money.  Because the penalties for money laundering are much more severe than for other crimes, criminal defendants must plead guilty or face much higher sentences. 

Now, the Supreme Court has injected a small element of sanity into the money laundering law.  In two decisions it handed down last week, the court concluded:

• The mere fact that you "conceal" money doesn't violate the money laundering statute.  The government must also prove that the concealment was designed to hide the source, ownership, or control of the money.
• *The "proceeds" of a money laundering crime should be interpreted to mean profits and not gross receipts. 

Taken together, these decisions significantly restrict the reach and scope of the money-laundering statute.  One practical effect is that you can no longer be prosecuted for money laundering merely for hiding cash at home, in a safety deposit box, or in your vehicle.  But more significantly, the decisions mean that the government won't be able to convert garden-variety financial crimes into money laundering prosecutions.

Congress, of course, can amend the law to specifically make it a money laundering offense to "hide money."  It could also redefine "proceeds" as "gross receipts." 

But for the moment, these decisions are good news for anyone concerned about financial privacy.  Not to mention the overarching authority of a government that demands that we reveal every detail of our financial affairs, or face draconian criminal sanctions.

Copyright © 2008 by Mark Nestmann