Asset Protection BLOG - Mark Nestmann

Big Brother Visits the Tattoo Parlor

Thinking about getting a tattoo?  If you are, better not pay cash!  If you do, the FBI has informed tattoo parlors in Los Angeles, and perhaps other cities, that you might be a terrorist. 

Yes, I'm serious.  You can read the FBI notice yourself by clicking here.  

Of course, paying cash at the tattoo parlor isn't the only thing that's suspicious.  The FBI helpfully warns that people who emit strange odors or who have missing hands or fingers might be suspicious.  So make sure to take a shower, and to wear your prosthesis, when you get your tattoo.

Another indicator of terrorism, apparently, are comments directed against the U.S. government.  So be sure to say nice things about Obama.  And for that matter, about George W. Bush as well.  That covers both political parties.  Also, be sure not to say anything about the blasting caps you recently procured, or about your plans to assassinate local politicians. 

It's also suspicious if a group of people all want the same tattoo.  God forbid you're a member of a fraternity or sorority in which pledges are encouraged to get "inked." 

So what's a tattoo parlor that wants to help the FBI fight terrorism to do?  If you show up with cash, smelling bad, missing limbs, or making vague threats against Obamacare, the tattoo parlor is encouraged to contact the City of Los Angeles Joint Regional Intelligence Center.  Also, it should
require valid identification from all customers and keep records of all purchases.  But my very favorite recommendations are straight out of the Stasi domestic spy manual:

• Talk to customers, ask questions, and listen to and observe their responses
• Watch for people and actions that are out of place
• Make note of suspicious statements, people, and vehicles.

I don't have any tattoos, and I've never spent any time in a tattoo parlor.  However, until it closed a few years ago, one of my favorite hangouts in Scottsdale was a little coffee shop next door to a tattoo parlor.  And every time I visited the coffee shop, I would briefly see some of the tattoo parlor's patrons, and even overhear snatches of conversation.

If anyone would be out of place visiting that parlor, it would be me.  After all, I don't have any tattoos, at least not yet.  Nor do I have piercings in my ears, nose, lips, tongue, or anywhere else, for that matter.  I don't have blue spiky hair, or any knowledge of "World of Warcraft." And, to the best of my knowledge, none of my clothes display Satanic symbols.

So I can just imagine what might transpire if I actually went in the door to inquire about a tattoo.  The patriotic proprietor would excuse himself, go to a back room, and pick up the telephone.

"There's a middle-aged guy carrying a briefcase who just came in to inquire about a tattoo.  He's 30 years older than most of our customers and he's babbling about something called 'limited government," whatever that is. He wants to pay cash, won't give us his Social Security number, and I don't think he took a shower today.  Can you send someone over to pick him up?"

Copyright © by Mark Nestmann

The Unacknowledged Implications of Obama's "War on Offshore"

Although the war of words between the United States and Switzerland has calmed down in recent days, the U.S. criminal case against Swiss banking giant UBS is still very much alive. 

As matters now stand, the IRS is demanding that UBS turn over banking records on more than 52,000 U.S. depositors.  It's waiting for the U.S. District Court in Miami to issue an order to UBS requiring compliance with its demand. On the other side, the Swiss Ministry of Justice has stated that it will block UBS from handing over the information, no matter what the court decides.

The latest news is that Micheline Calmy-Rey, Switzerland's Foreign Minister, will meet with U.S. Secretary of State Hillary Clinton on July 31 to discuss a settlement.  I expect that Calmy-Rey and Clinton will both want avoid a showdown between the United States and Switzerland.  The most likely outcome will be that UBS pays a hefty fine, releases a few thousand account records (but far fewer than 52,000), and then retreats to lick its wounds. 

However, the implications of this high-stakes financial drama go beyond UBS and indeed, beyond Switzerland. Looking at the bigger picture, it's obvious that the Obama administration wants to discourage Americans from investing outside the United States.  In recent months, the Obama administration and the IRS have launched a series of initiatives that if fully implemented will make it much more difficult for Americans to deal offshore. 

This isn't the place to discuss these plans in depth, but in addition to the criminal action against UBS, they include:

• A bill now before Congress establishing a presumption that any U.S. person with offshore dealings is guilty of tax evasion.  The taxpayer could rebut this presumption by presenting sufficient evidence to the IRS that he or she is in full compliance with U.S. law.
• An expansion of the IRS "qualified intermediary" requirements that would make it much more cumbersome for foreign banks and investors to invest money in U.S. securities.
• A dramatically expanded role for the SEC in policing investments of U.S. residents in non-U.S. securities, even for unsolicited purchases.

These initiatives aren't only designed to frustrate U.S. persons from investing abroad.  They're also designed so that foreign banks and brokerages will refuse to do business with them.  Indeed, a Deferred Prosecution Agreement that UBS signed in February 2009 to end an earlier lawsuit by the IRS requires the bank to terminate all cross-border business with U.S. clients and close their accounts.   

But it's not just UBS that's closing the door to U.S. clients.  In the last few weeks, I've received dozens of e-mails and phone calls from U.S. clients with bank accounts in Switzerland, Liechtenstein, Singapore, England, and other countries.  All have been informed that their accounts are being unilaterally closed or severely restricted. 

The situation is particularly serious for U.S. citizens living abroad.  In one case, a woman who's lived in Switzerland for 40 years had her Swiss account closed when her bank decided it would no longer service U.S. citizen clients.  This woman then contacted a U.S. bank to open an account.  The bank informed her that new due diligence rules from the U.S. Treasury no longer permitted it to provide banking services outside the United States. 

But the true implications are even broader, and affect the entire country, not just Americans who wish to invest internationally, or live abroad.  The U.S. government is now running multi-trillion-dollar annual deficits.  A large portion of this deficit is financed through foreign investments.  Given the protectionist barriers the U.S. government is erecting, it seems likely that at least some foreign investors will grow frustrated at being presumed to be criminals when dealing with U.S. financial institutions. 

In the short term, the U.S. actions may generate a modest amount of tax revenue—although far short of the US$100 billion in annual revenue postulated by IRS apologists.  But in the longer term, these protectionist measures are bound to make it more difficult for the United States to finance its gargantuan debts.  And this in turn could lead to a rise in interest rates and even greater erosion in the value of the U.S. dollar.

(The Nestmann Group, Ltd. can assist individuals whose offshore banks have severed account relationships in setting up alternative accounts.  Contact us at info@nestmann.com for more information.)

Copyright © 2009 by Mark Nestmann

Will Pandemic Declaration Lead to Financial Defaults?

Earlier this week, the World Health Organization declared the spread of the H1N1 flu virus, the causative agent of the so-called "Swine Flu" to be a "flu pandemic." 

This is the first time in more than 40 years that the WHO has made such a declaration.  And it seems rather odd that it would do, given that this "pandemic" has had such minimal impact.  The last time that the WHO declared a flu pandemic was in 1968, when the Hong Kong flu strain killed more than a million people. 

By contrast, as of June 15, the H1N1 flu strain has killed a mere 163 people.  That's a significant number, but by comparison, complications of ordinary flu kill about 36,000 Americans every year.  True, the spread of the H1N1 strain technically meets the definition of a pandemic—an epidemic that is geographically widespread.  Since its discovery in April in Mexico, the virus has spread to 74 countries on five continents.

But the pandemic declaration also has some very significant collateral side effects that could be extremely useful to banks, insurance companies, and hedge funds locked into losing positions on derivative contracts.  Call me paranoid if you want, but many such contracts contain a "force majeure" clause that allow the signatories to cease meeting their obligations in situations beyond anyone's control. Pandemics are typically listed as reasons for calling a force majeure.

Now, it so happens that Friday, June 19 is a very significant date when it comes to derivative contracts.  That's because the last hour of trading will be one of only four so-called "Quadruple Witching Hours" each year, in which contracts for stock index futures, stock index options, stock options and single stock futures all expire simultaneously.  That's only two days away, but if all hell breaks loose in the markets between now and then—or if any of the counter-parties for these contracts can't deliver—they may well declare force majeure.

Seen in this light, the WHO's declaration of pandemic may be more of an economic diversion than a public health emergency.  Indeed, interpreted in this light, a more accurate rendition of "swine flu pandemic" may be one its anagrams; "unwind limp faeces."

Copyright © by Mark Nestmann

"Article 26" and the Demise of Offshore Banking Secrecy

If you invest or do business internationally, you need to know about double taxation agreements, more commonly called "tax treaties."  These agreements are designed to avoid or at least minimize double taxation.  However, they have another, less publicized function: to facilitate information exchange to help enforce domestic tax laws. 

One of the consequences of the political firestorm in recent months over bank secrecy laws in Switzerland and other offshore financial centers is that information exchange through tax treaties will become increasingly common.

Tax treaties are based on a model treaty prepared by the Organization for Economic Cooperation and Development (OECD).  The OECD regularly updates its model treaty.  Each successive model provides tax authorities greater powers to retrieve financial information from the other signatory.  This is accomplished via the "Exchange of Information" provision in the model treaty; Article 26.

Early tax treaties gave signatories wide latitude to turn down requests for information under Article 26.  Signatories could turn down requests for information under several different rationales, all based on the concept of "comity;" i.e., the recognition accorded by one nation to the laws and institutions of another. 

For instance, a signatory could turn down an information request if it concerned a tax not imposed by that country (“domestic tax interest”).  It could also invoke a "dual criminality" requirement: if the conduct in question wasn't illegal in both countries, the request wouldn't be honored. 

However, in 2000, the OECD completely revamped Article 26 to expand the scope of information exchange.  Bank secrecy laws, dual criminality requirements, and domestic tax interest requirements could no longer be invoked to prevent information exchange.  These provisions have gradually made their way into the international network of tax treaties. 

Therefore, if a particular country agrees to implement information exchange arrangements "consistent with OECD standards," the laws you thought might have prevented your financial information from being disclosed to your domestic tax authorities may no longer apply.  Almost every country with strict bank secrecy laws, including Andorra, Austria, Belgium, Liechtenstein, Luxembourg, Monaco, and Singapore, has announced it will comply with the expanded version of Article 26.  Panama has not provided specific assurance on this point, but has made a commitment for "effective exchange of information" in accordance with OECD standards.

Still, there are limits to Article 26.  The OECD model only requires treaty signatories to exchange information on request.  That is, the country requesting information must know that your assets or accounts are in a particular jurisdiction—and likely, in a particular institution—before it can request information.

These limits are unlikely to satisfy the more rabid advocates of full disclosure.  You can likely expect the next round of the OECD model tax treaty to include a provision for mandatory "automatic" exchange of information between tax authorities. 

In the meantime, the handwriting is definitely on the wall.  Offshore bank secrecy laws will not protect you from having your account information turned over to your domestic tax authorities.  If you have unreported offshore accounts, you need to deal with the problem now—not later.  A good start would be a call to an attorney specializing in criminal tax defense.

Copyright © 2009 by Mark Nestmann

Get Ready for Exchange Controls! [Part III]

In my last two blog entries, I described what exchange controls are, how they operate, and why they may be coming to your country. 

Unfortunately for the governments that impose them, exchange controls simply don't work.  The longer they're in place, the more ways clever people find to get around them.  To begin with, exchange controls create a huge black market and an accompanying criminal class.  This phenomenon is well known in countries with stiff criminal penalties against mind-altering drugs. 

Exchange controls also inevitably disrupt legitimate businesses.  For instance, Venezuelan exchange controls, re-imposed in 2003, bankrupted thousands of small and middle-sized businesses because they could no longer obtain foreign currency. 

Moreover, while Venezuela's foreign currency reserve position stabilized after it imposed exchange controls, remittances of foreign currency fell dramatically.  This led to a steep decline in the standard of living for most residents.  Many of Venezuela's most successful citizens emigrated to other countries, particularly those lucky enough to qualify for another passport, or wealthy enough to purchase one. 

Despite the many shortcomings of exchange controls, the historical record is clear.  In times of economic crisis, protectionist sentiments grow.  Those advocating protectionist measures label anyone with offshore investments or other financial interests as traitors.  Foreign exchange controls are a way of dealing with these purportedly disloyal citizens.

Human ingenuity being what it is, exchange controls are successfully—and often illegally—bypassed almost as soon as they're imposed.  For instance, in Venezuela, individuals and businesses use the following strategies to deal with them:

• Purchase Venezuelan stocks traded in the United States using bolivars (the national currency) acquired at the official government rate.  The buyer then sells these shares for U.S. dollars at the market exchange rate. 
• Open a brokerage account with a Venezuelan stockbroker and deposit bolivars there.  Purchase dollar-denominated Venezuelan government bonds in local currency.  They buyer then exchanges them for U.S. Treasury bills in New York and deposits the proceeds in a U.S. account. 
• Exchange bolivars for dollars in the foreign exchange black market.  In downtown Caracas, thousands of black market currency traders are available to facilitate such exchanges. 
• Mis-categorize imported goods to qualify for exchange control preferences or exemptions.  Venezuelan exchange controls include a permit system by which the central bank controls who can purchase foreign currency to pay for imports.  The government gives top priority in foreign currency allocation to imports of capital goods, food, and medicine.  Importers may provide false customs declarations listing these items when in fact they are importing other, non-exempt goods.
• Maintain bank or securities accounts outside Venezuela.  These accounts are funded through the proceeds of the stock or bond transactions previously described and are effectively out-of-reach of the Venezuelan authorities.
• Bribe officials at the exchange control board (CADIVI) to approve preferences or exemptions.  Theoretically, an importer should be willing to pay a bribe up to the amount that would be the difference between the official exchange rate and the black market exchange rate. Such corruption has been thoroughly documented by the Venezuelan press. 

In the United States, President Obama hasn't proposed exchange controls, at least not yet.  The dollar continues to appreciate against other currencies, so there's no immediate pressure to do so.  However, Obama has advocated that offshore "tax havens" be shut down.  And as I mentioned in Part I, the Treasury is already studying a dramatic expansion of reporting requirements for international transactions—a necessary prerequisite to exchange controls.  When investors begin fleeing the dollar, and its value collapses, exchange controls may quickly follow.

U.S. residents concerned about the prospect for exchange controls in this country need to prepare for them now.  The most basic strategy is to open a foreign bank account or to store precious metals at an offshore safekeeping facility. 

However, any U.S. exchange controls (in common with those in most other countries) may prohibit U.S. residents from maintaining a foreign account or other foreign investments without a "permit" to do so.  Without a permit, the government may force you to repatriate your foreign account in exchange for dollars at the official exchange rate.  This rate may be much less than the market exchange rate. 

A better strategy may be to create an international structure in which you are not the owner of the underlying investments, but only a beneficiary.  An offshore trust and some types of offshore annuity investments provide this sort of protection.  Historically, payments from overseas life insurance and annuity policies have been exempt from foreign exchange controls—although there's no guarantee they would be in the future.  An additional benefit is that these structures provide significant protection against claims in civil litigation.

Are foreign exchange controls coming to the United States?  I certainly hope not.  But if they do, I hope you've made arrangements to prepare for their arrival.

Copyright © 2009 by Mark Nestmann