Asset Protection BLOG - Mark Nestmann

Could Your Offshore Jurisdiction Go Bankrupt? [Part II]

In Part 1 of this column, I described some of the financial challenges affecting numerous offshore jurisdictions, particularly current or former colonies of the United Kingdom.

But it’s not only English-speaking offshore jurisdictions that face serious financial challenges.  And in many cases, these jurisdictions are considering—and implementing—new laws and regulations that adversely impact non-resident investors.  Here’s a rundown of what to expect in the months ahead:

Non-English Speaking Jurisdictions Face Problems, Too

It's not only U.K. territories that face significant revenue shortfalls.

Uruguay is a great example.  If you’re legally resident in Uruguay, you pay tax only on your Uruguay-source income.  This policy has made Uruguay a popular destination for well-heeled expats.

However, last May, the government introduced legislation that would tax residents of Uruguay on their worldwide income.  The law would also impose a wealth tax on all offshore assets.  Needless to say, taking up residence in Uruguay looks less attractive than it once did, although the government now says foreigners who come to retire in Uruguay won't be affected.

Other popular low-tax jurisdictions facing significant revenue shortfalls include the Cook Islands and Dubai.

Cuba—the Sleeping Caribbean Giant

In the midst of this economic uncertainty, don't forget about the largest island in the Caribbean—Cuba.

Right now, with their offshore sectors in tatters, tourism is the major revenue stream for Caribbean offshore centers.  And in this economic crisis, tourism has fallen sharply.  Those tourists that still show up don't spend as much.  

But what happens to the Caribbean tourism industry when the U.S. Congress ends longstanding economic sanctions against Cuba?  There's broad support for this measure among U.S. farm and business groups.  It's going to happen, perhaps very soon. And when it does, U.S. tourists will find a new and exotic vacation haven beckoning them only ninety miles from Key West.

The Caribbean Tourism Association predicts that if the U.S. government drops all travel restrictions against Cuba, more than one million U.S. tourists would visit the island annually.  That's one million tourists who may not have the time, energy, or money to visit more remote Caribbean jurisdictions.  The impact on these islands' economies will be severe.

How Will Offshore Jurisdictions React?

The most politically expedient stance for cash-strapped offshore jurisdictions is to loot the assets of foreign investors who don't vote.  In order of increasing severity, such measures could include:

• Imposing personal and corporate tax on worldwide income.
• Confiscation of local assets in companies and trusts deemed "dormant." Last week, the Cayman Islands enacted legislation mandating this outcome.
• Restrictions or taxes on outgoing funds transfers.
• Forced dilution of shareholder equity in local companies.

What can you do to protect your investments against the increasing likelihood of less favorable tax, regulatory, and asset protection provisions in financially challenged offshore jurisdictions? In the August issue of The Sovereign Individual I’ll outline six strategies to protect yourself from these outcomes.  Just click here to begin your risk-free membership.

The unprecedented challenges now facing the offshore world aren't going away.  Make sure you're prepared for the unexpected!

Copyright © 2010 by Mark Nestmann

Could Your Offshore Jurisdiction Go Bankrupt? [Part I]

Offshore centers now face a perfect financial storm.  In more prosperous times, revenues from the offshore sector, along with tourism, helped fuel these countries' economies.  Their governments emulated more developed nations by borrowing heavily to build up their infrastructure.  They also bought votes with social programs and bloated government payrolls. 

When the global economy tanked, tourist revenues fell, along with revenues from their offshore sectors.  But the social programs and bloated payrolls remained.

Blame Offshore Tax Havens! (Again)

The economic crisis also led to worldwide drop in tax revenues, with the biggest losers big industrialized countries like the United States.  Politicians in these countries found a convenient scapegoat to blame for falling tax revenues: dozens of mostly tiny offshore centers. 

Using the economic crisis, the world’s richest and most powerful governments had the perfect opportunity to achieve a long-term goal: forcing offshore jurisdictions to enforce their tax laws.  They acted through non-governmental organizations they control, such as the Organization for Economic Cooperation and Development (OECD).  The OECD has the authority to issue supposedly non-binding "best practices" guidelines.  And, the OECD now decrees that “best practices” meant becoming tax collectors on behalf of these rich and powerful governments. 

The one-two punch of the global financial crisis and the OECD vendetta has led to unprecedented economic challenges for offshore centers.  Some—Gibraltar, Hong Kong and Singapore, for instance—remain in relatively good shape financially.  Others, particularly in the Caribbean, are having a hard time paying their bills.  The British press, for instance, refers to the Cayman Islands as "bankrupt." 

Could offshore jurisdictions facing the worst challenges actually declare bankruptcy?  Not if they can reduce spending, or qualify for additional loans.  A condition of additional lending, however, may be to impose direct taxes, such as personal and corporate income taxes.

Here's a rundown of where the offshore financial crisis now stands.

U.K. Government Declares War on English-Speaking Offshore Centers

It was once official U.K. policy to encourage responsible growth in the offshore sectors of its current and former colonies.  But, starting in the late 1990s, the U.K. government began to dismantle the offshore sectors of its former empire. 

It was easiest in U.K. overseas territories, where the U.K. Parliament has the authority to enact binding legislation.  In those territories, the British Foreign Office simply threatened legislation that would force those governments to enforce foreign tax laws.  To avoid that politically unpopular outcome, the overseas territories enacted the demanded laws on their own.

The most recent crackdown began in 2008, when the U.K. government commissioned an independent review, led by former Treasury official Michael Foot of its overseas territories and "Crown dependencies" with offshore sectors. 

The Foot Report observed that the global financial crisis had led to significant financial hardships:

The impact has been pronounced in Anguilla, the Cayman Islands and the Turks and Caicos Islands resulting in depleted public sector cash reserves. Bermuda and the British Virgin Islands have also experienced a decline in government income, but the impact has been less severe. Revenues have held up better in the crown dependencies [Jersey, Guernsey, and the Isle of Man] and Gibraltar.

The report recommended that those jurisdictions facing depleted treasuries should consider spending cuts and imposing direct taxes.  Foot suggested that any bailout by the U.K. government be contingent on a viable recovery plan, which presumably could include direct taxes.

Nowhere did the report state the most obvious possible recommendation: that the OECD back off and let these islands play by the same set of rules the OECD gives its own members.

Indeed, many OECD jurisdictions are themselves offshore centers: notably, Luxembourg, Switzerland, the United Kingdom, and the United States (the world's largest tax haven for non-U.S. resident investors).

The reality is that London is using the global financial crisis to undermine the low-tax regimes in place by arguing that the territories need to "broaden their tax base."

Hardball Politics

Just to make sure the remnants of its colonial empire got the message, the U.K. government has imposed much tougher standards for loans and loan guarantees. 

In 2009, the Cayman government, facing an $82 million budget deficit, appealed to its colonial masters in London for permission to borrow $310 million from banks.  Despite the fact that commercial banks had already approved the loans, the British Foreign Office said "no."  

The Cayman government then commissioned a team to conduct an independent review of the islands' fiscal challenges.  The review’s key recommendations were to cut government spending and to privatize most government-run enterprises. 

Reaction was swift and furious against the plan.  The Cayman government refuses to make significant spending cuts.  This makes an eventually bailout likely, with unfavorable terms in respect to direct taxes.  The government has also recently enacted legislation that authorizes confiscation of local assets in “dormant” companies and trusts.

What other offshore jurisdictions face problems?  And how are offshore jurisdictions reacting to the perfect financial storm they now face?  Stay tuned for Part II in my next blog entry.

Copyright © 2010 by Mark Nestmann

Civil Forfeiture: A New Tool to Balance State and Local Budgets

While the talking heads on television declare the recession over, in the meantime, state and local governments face record deficits.  Here in Arizona, our state budget deficit represents more than 50% of anticipated 2010 revenues.  And while Arizona faces perhaps the largest per-capita budget shortfall in the United States, many other states have a similar funding crisis.

Unfortunately, there are very few politically expedient ways to stem the flow of red ink.  Raising taxes is not only politically unpopular, but threatens to further depress state and local economies.  Cutting benefits is even less popular. 

On the other hand, confiscating the "proceeds of crime" has a near-universal appeal.  And using "civil forfeiture" statutes in effect in all 50 states, police have pursued this tactic aggressively.

Civil forfeiture is a legal procedure in which prosecutors can seize your property without accusing you, much less convicting you, of any crime.  Most federal civil forfeitures require the government to at least demonstrate probable cause that your property is somehow connected to a crime to confiscate it.  But the federal rules don't generally extend to state and local governments.  In many states, the government can simply seize your property and wait months before allowing you to contest the forfeiture.

That was the situation facing the U.S. Supreme Court in a case that I wrote about here. I had very low expectations that the court would overturn the Illinois statute that authorizes the civil forfeiture of cars and other property allegedly used in connection with drug offenses.  The issue before the court was a matter of fundamental due process: under Illinois law, the state need not schedule a forfeiture hearing for at least six months after the initial seizure.  Often, owners of seized property must wait much longer than that for an opportunity to argue that their property wasn't used illegally, or was used without their knowledge or consent.

For that reason, I wasn't in the least surprised that the court didn't overturn the Illinois law at issue.  The court did so by relying on a legal technicality that permits it to declare an issue "moot."  Here, the court ruled since there was no longer any "case or controversy" between the parties, it had no jurisdiction over the case.  Both sides admitted they had resolved their property disputes during the course of the litigation.

So, as matters now stand, the state of Illinois can continue seizing property of innocent owners and depriving them of a hearing for at least six months.  Other states that don't already have aggressive civil forfeiture procedures in place are certain to take notice.  And, because police will allege that the property seized is connected to "crime," such forfeitures should be politically popular.

How can you avoid becoming a civil forfeiture victim?  The most important precaution is to never permit anyone to use your home or vehicle for any purpose that could be construed as being illegal.  Another important precaution is to beware of holding large quantities of cash, unless you can demonstrate ironclad proof that it came from a legitimate source. 

Probably the best way to avoid civil forfeiture, though, is to relocate liquid assets out of the United States, as fast as you can.  Today wouldn't be too soon to begin.

Copyright © 2009 by Mark Nestman

TSA Airport Security Personnel no Longer to Act as "Cash Police"

It's not often that I can report news that's actually favorable to financial privacy.  Today is a happy exception.  I'm pleased to report that the Transportation Security Administration has modified its rules regarding detaining and questioning airline passengers carrying large quantities of cash.

In March 2009, TSA officials in St. Louis detained Steven Bierfeldt after discovering US$4,700 in cash in his carry-on bag.  Bierfeldt, the Director of Development for the Campaign for Liberty (an offshoot of Congressman Ron Paul's presidential campaign), was about to board a domestic flight. 

TSA agents placed Bierfeldt in a small room and began to interrogate him.  Bierfeldt refused to answer the questions.  Instead, he repeatedly asked the agents to explain the scope of their authority to detain and interrogate him.  Not only did the agents refuse to do so, they also told Bierfeldt he was being arrested. 

Fortunately, Bierfeldt had the presence of mind to make an audio recording of the incident on his cellular telephone.  The recording reveals a series of threatening and expletive-laden questions relating to why Bierfeldt was carrying cash.  When he was finally released, Bierfeldt turned the recording over to the American Civil Liberties Union.  Shortly thereafter, the ACLU sued the Department of Homeland Security, which has authority over the TSA, on his behalf.   

TSA officials are authorized to conduct safety-related searches for weapons and explosives. They have no right to interrogate passengers about matters unrelated to passenger safety.  Carrying cash aboard a flight obviously poses no safety risk.  And it's perfectly legal to carry as much cash aboard an airplane as you want.  Unless you're transporting more than US$10,000 in cash across a U.S. border, no reporting is required. 

I anticipated a long and drawn-out lawsuit in this case.   Indeed, I thought the TSA might press for new rules providing explicit authority for agents to confiscate "suspicious" quantities of cash.  However, I was happily surprised to learn last week that the TSA has instead issued new rules that prohibit agents from interrogating passengers on matters unrelated to aircraft safety.  Transporting US$4,700 in your carry-on bag, or US$470,000, for that matter, doesn't qualify. 

However, I still don't recommend that you transport a large quantity of cash on an airplane departing and/or or arriving in a U.S. airport.  The reason is that at some airports, TSA screening may be supplemented by a separate inspection for narcotics.  Most U.S. and foreign currency contains minute traces of narcotics residues.  A drug-sniffing dog is likely to "alert" to any large quantity of cash you're carrying.  That alert may provide probable cause for police to then seize the cash under federal or state civil forfeiture laws.  You may or may not get the cash back, and you'll face an expensive and protracted court battle to prove it came from a legitimate source.

Copyright © 2009 by Mark Nestmann

Feds: First, We Led Your Husband to Suicide. Now, We're Coming for Your Property

It's time for me to once again rail against the inhumane practice of civil forfeiture.  This time, the victim is a sympathetic one, and she may ultimately prevail.  But, the price she's already paid in her battle against Leviathan is heartbreaking.

Mara Lynn Williams is a 56-year-old cancer survivor.  She lost her husband, Royce, several months ago.  And now, she's battling to save her 40-acre hardscrabble farm in Chilton County, Alabama from seizure by government authorities.

You see, Royce smoked marijuana.  Not because he was trying to get high, but because it was the only substance that relieved his chronic pain after multiple surgeries.

However, in federal government's War on (Some) Drugs, persons who smoke marijuana for any reason are considered criminals.  And that's particularly true if they cultivate it, as Royce did on the couple's farm. 

Royce was growing an awfully large amount of pot for purely personal use.  When the feds raided the couple's property in 2008, they found 408 marijuana plants growing several hundred yards from the house.  Not surprisingly, they charged him with cultivating marijuana with the intent to sell it.

In May 2009, as a jury was deliberating the charges against Royce, he climbed into the family car and shot himself.  His death ended the criminal case, but prosecutors decided to try to seize the couple's property, even though they never accused Mara Lynn of any crime.  After all, as Asset Forfeiture Coordinator Tommie Brown Hardwick says, "The bottom line is, we don’t want people to benefit from criminal activity."

Let's count all the ways that Mara Lynn Williams has benefited—or not—from criminal activity. 

First, prosecutors never accused Royce—or Mara Lynn of actually selling marijuana.  They only accused Royce of cultivating it with the intent to sell it.  So, Mara Lynn didn't receive a penny in "criminal proceeds."

Second, during the raid on the couple's property, police seized firearms, $18,400 in cash, vehicles, computers and other personal belongings.  Mara Lynn got some of the vehicles back, but not the cash.  Far from benefiting from criminal activity, Mara Lynn is out $18,400.

Third, Mara Lynn has had to hire an attorney to represent her in the forfeiture case.  I'm not privy to the fee arrangements, but typically, attorneys defending civil forfeiture cases charge a retainer of $20,000 or more.

Thanks to a civil forfeiture reform law enacted in 2000, prosecutors will have to demonstrate that Mara Lynn knowingly participated in Royce's drug cultivation operation in order to seize her property.  Otherwise, she is considered an "innocent owner." 

In the meantime, Mara Lynn continues to work as a nurse at Jackson Hospital in Montgomery.  The government through its insane drug war has already taken her husband and $18,400 of the couple's savings.  Now it wants to make her homeless.  In the meantime, she's waiting for her cancer—now in remission—to return.

“It has been in remission before, so I know it will be back,“ she says.  And sadly, so will the forfeiture squads.

Copyright © 2009 by Mark Nestmann

Supremes to Decide whether States Can Indefinitely Delay Forfeiture Hearing

I've never been convinced that the U.S. Supreme Court has any interest in actually defending the Constitution and Bill of Rights.  Among other decisions "protecting" our freedoms, the Supreme Court has:

• Upheld the power of state and local governments to seize private property from one group of people for the benefit of a more powerful private interest
• Upheld the power of the federal government to prohibit farmers from growing crops on their own land for their own consumption
• Upheld the right of the President to invalidate contracts calling for the settlement of debts in gold or other precious metal, rather than in fiat dollars.

I could go on and on, but the record is clear that for more than two centuries, the Supreme Court has systematically eviscerated the freedoms the Founding Fathers bestowed upon us.

For that reason, I'm not particularly optimistic about the prospects for the latest legal challenge to the horrific practice of "civil forfeiture" to reach the Supreme Court.  (Civil forfeiture is a legal procedure in which prosecutors can seize your property without accusing you, much less convicting you, of any crime.)  The Court has agreed to hear a challenge to a law in Illinois that permits the State to seize someone's property without a warrant, and then indefinitely delay a hearing to determine whether there is probable cause to detain the property (Alvarez vs. Smith, Case No. 08-351).

My guess is that the Court will uphold the right of Illinois to simply seize your property and deny you any right to challenge the seizure in court.  I make this prediction not only because of the Court's long record of upholding laws and regulations that destroy our rights, but because of a long line of decisions specifically upholding draconian civil forfeiture statutes. 

In 1827, the Court confirmed that the government could confiscate your property in a civil forfeiture without a criminal conviction and that property of people entirely innocent of any wrongdoing whatsoever could be forfeited. In 1878, the Court again upheld the right of the government to seize property from an entirely innocent owner.  It did so again in 1921 and then, to make sure we really got the point, made the same determination in 1996. 

In 2000, Congress enacted a civil forfeiture reform statute that established an "innocent owner" defense for most federal civil forfeitures.  But in forfeiture under state law, no innocent owner defense may be available.  Even if it is available, in states like Illinois, the government may indefinitely delay legal proceedings to allow you to assert it.

Civil forfeiture is a legal abomination that has no place in a civilized society.  A Supreme Court interpreting the Constitution and Bill of Rights as written wouldn't merely restrict civil forfeiture, but abolish it at all levels of government.

There's not a snowball's chance in a blast furnace that will happen in this case.  The best we can hope for is that the Court will invalidate the Illinois law due to the ability of the state to effectively deny civil forfeiture victims the right to a hearing.  And I'm not optimistic.

To learn more about civil forfeiture, visit the Web site of Forfeiture Endangers American Rights (FEAR) at http://www.fear.org.  It's a great source of hard-to-find information on civil forfeiture—and a great antidote to the avalanche of pro-forfeiture propaganda on the Internet.

Copyright © 2009 by Mark Nestmann

Britain Imposes Direct Rule on Turks & Caicos

While it's not well known, the British Empire isn't dead.  It's only in hibernation.  Occasionally, Britain awakens from somulence and exercises long-forgotten "retained powers" that give it essentially dictatorial powers over the remnants of its colonial empire.

This legacy of colonial rule re-emerged earlier this month when Britain's Foreign and Commonwealth Office (FCO) took the first steps toward imposing "direct rule" over the Turks & Caicos Islands (TCI).  All this happened in a very British way: before the government imposes direct rule, committees of experts prepare detailed reports detailing the problems in a particular colony or colonies (now reborn as "overseas territories").  The reports recommend a solution to the problems found, which inevitably involve a loss of privacy or autonomy in the territory in question.  Then the FCO or other government office issues a thinly veiled warning to the territory about the consequences of neglecting the recommendations. 

This was the pattern in the TCI, and in its case, the problems are very real.  Several months ago, former Lord Justice Sir Robin Auld's Commission of Inquiry issued a still-unpublished report into "possible corruption or other serious dishonesty in relation to past and present elected members of the Legislature in recent years."  Among other conclusions, the report found:

• There were "clear signs of political amorality and immaturity and of general administrative incompetence"
• The TCI government is "at a near standstill" with its "financial position so bad that the Government cannot pay many of its bills as they fall due"

The Auld Commission recommended that the TCI's governor (naturally appointed in London) suspend the constitution "for an indeterminate period."   In place of elected representatives, Auld recommended replacing the local government with direct rule from London.  Finally, Auld recommended the U.K. government aggressively prosecute alleged wrongdoers, in some cases without a jury trial. All these initiatives are perfectly legal under the "Westminster Constitutions" governing U.K. overseas territories.

This process is now underway, although in slow motion.  A team of British investigators, lawyers and administrators is ready at a moment's notice to travel from London to the TCI to replace the elected Parliament.  A British naval frigate is on patrol in the Caribbean to provide military support if recalcitrant TCI politicians don't fall into line. 

And fall into line they have, at least in part.  The elected government now says it will push forward with at least some of the reforms in the Auld Commission report.  But if they fail to do so, the British government, backed by military force, is ready to do so.

Let me be very clear.  For more than a decade, I've heard numerous reports of systemic corruption and cronyism in the TCI.  For this reason, I've avoided recommending it (although its captive insurance laws and infrastructure are reasonably good).  It also seems very likely that the only way corruption can be brought under control is with outside intervention.

However, it's important to realize that several other British overseas territories with significant offshore sectors have precisely the same—or a very similar— constitutional status as the TCI.  These jurisdictions include Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, and Gibraltar.  In all of these territories, the British government can—and on occasion has—imposed legislation on the inhabitants over the head of the elected legislature. 

For instance, in recent years, Britain has "encouraged" its overseas territories to sign Tax Information Exchange Agreements with high-tax countries.  These agreements require the territories to release financial information on clients of banks and trust companies upon request to tax officials in the signatory countries.  Britain is now "encouraging" those same territories to comply with the information-exchange provisions of the European Savings Tax Directive, which essentially eliminates financial privacy in nearly every European Union country. 

For many investors—myself included—there's a certain comfort knowing that Britain stands behind its overseas territories.  Yet this comfort comes at a terrible price to democratic rule and financial privacy.  Before you invest or do business in any of these jurisdictions, be aware of what you're dealing with. 

Copyright © 2009 by Mark Nestmann

International Man Interviews Mark Nestmann

I’ve long been an admirer of Doug Casey, author of The International Man and Crisis Investing for the Nineties.  Doug’s unapologetic libertarian philosophy and his refusal to bow to conventional thinking has led me to read just about everything he’s written over the past two decades.

Doug’s well into his sixties now, but he has a lot of much younger men and women following in his footsteps.  One of the savviest is Simon Black, who publishes a blog called International Man. It’s a little hard to describe International Man, but perhaps the simplest characterization is that it combines a travelogue and investment recommendations overlain with an unabashed capitalist outlook.

In any event, I was pleased when Simon’s partner Matt, who happens to be a client of mine, contacted me and asked if he could interview me for Without Borders.  We conducted the interview earlier this week and you can listen to it free by clicking here—--scroll down for the interview. 

Matt’s a pretty bright guy and caught me a little off-guard with some of his questions.  I think you’ll enjoy listening to our give and take.  Again, here’s the link.

Forfeiture 101: Intro to Asset Forfeiture Legal Defense

One of the causes I feel most passionate about is reform of America's notoriously unfair forfeiture laws, under which people guilty of no crime whatsoever can lose their property.  

Reform isn't likely anytime soon, particularly given the funding crisis facing the U.S. government. And that makes it especially important to understand the legal tools available to fight these unjust laws.

As the Treasurer of the forfeiture reform organization Forfeiture Endangers American Rights (F.E.A.R.), I feel especially proud of this organization's latest contribution to teach attorneys and forfeiture victims about the legal tools they have available to fight back against these monstrous laws: Forfeiture 101.

Forfeiture 101 is the first in a series of F.E.A.R.'s clear, concise and informative DVD courses on substantive forfeiture law and procedure. It is a course that qualifies licensed attorneys for continuing legal education credit while educating them on the intricacies of asset forfeiture law. 

Lawyers taking on their first forfeiture case find that law school never prepared them for the maze of complex proceedings that adhere to Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions.  To add even more complexity to the mix, some forfeiture proceedings are subject to the reforms of the Civil Asset Forfeiture Reform Act of 2000.  But others aren't.

If you're a defense attorney, Forfeiture 101 will help you expand your practice to meet the needs of the vastly increasing number of victims of the government's ever-broadening overreach for assets and money judgments.

Forfeiture victims will find this DVD to be a  godsend – especially those forced to represent themselves because they can't afford counsel.

This entertaining and informative two-hour DVD serves as a crash (or refresher) course in forfeiture law, as well as an interactive computer research tool.  Pop the DVD in your computer and click the menu for the chapter you need to research. As you listen to a narrative overview of the issues, you can pause at any time and note the case and statute citations that appear on the screen accompanying the narration.

Here's a rundown of the contents of Forfeiture 101:

• Chapter 1: Dangerous Misconceptions About Forfeiture
• Chapter 2: Historical Origins of Forfeiture's Quirky Procedures
• Chapter 3: The Ever-Growing Number of Forfeiture Laws
• Chapter 4: Defenses Against Forfeiture
• Chapter 5: Which Track: Civil or Criminal Forfeiture?
• Chapter 6: Civil Forfeiture: A Torturous, Treacherous Trail
• Chapter 7: A Fork in the Path:  CAFRA or Customs Procedures?
• Chapter 8: An Alternate Route: Criminal Forfeiture

To learn more about Forfeiture 101, follow this link: http://www.fear.org/whatsnew.shtml.

You can purchase Forfeiture 101 before July 4 for the special price of only $100 plus $8 shipping! Or save even more with FEAR's special introductory forfeiture package deal: Forfeiture 101 DVD with the F.E.A.R. Asset Forfeiture Defense Manual, plus a one-year subscription to F.E.A.R.'s bank of legal briefings ("Brief Bank") for only $300 plus $12 shipping.

Even if you don't purchase Forfeiture 101, be sure to check out F.E.A.R.'s informative Web site at http://www.fear.org.  It's a great source of hard-to-find information on civil forfeiture--and a wonderful antidote to the avalanche of pro-forfeiture propaganda on the Internet.

Get Ready for Exchange Controls! [Part II]

In my most recent blog entry, I described how exchange controls—laws restricting private ownership of, or transactions in, foreign currencies and gold—are spreading from third world countries to the industrialized world.  Since exchange controls proliferate in economic crises, they may be coming to your country. 

How do governments impose foreign exchange controls?  In most cases, it is a step-by-step process.  The first step is already complete, in the form of laws in effect in every country.  These laws prohibit citizens (or anyone else) from exchanging their national currency for a fixed quantity of gold through the national Treasury or central. 

The second step is to impose rigorous reporting requirements for moving cash into and out of the country, and for foreign accounts.  These laws are also in effect in most countries, purportedly to fight "money laundering." 

The third step is to expand the reporting requirements to any transfer of assets in or out of the country, not just in cash or cash equivalents.  Many countries have these laws in effect as well.  In the United States, Congress has authorized the U.S. Treasury to study this initiative.

Once these reporting requirements are in place, the government can impose more stringent controls very quickly.  In the United States, President Obama can impose exchange controls with the stroke of a pen, via an executive order.  The enabling legislation is already in place, via the International Economic Emergency Powers Act (IEEPA). 

First, President Obama would issue a "declaration of economic emergency" under the IEEPA.  He would then issue an executive order giving the U.S. Treasury control over all movements of money into or out of the United States.  Transfers deemed vital to the U.S economy would likely be exempted from this requirement.  However, any person or company making "non-vital" transfers would have to route them through the U.S. Treasury.  After going through whatever approval process the executive order describes, the Treasury would convert your U.S. dollars to whatever currency you desire.  It would then send the payment along to its ultimate destination.  Funds coming to you from abroad would be subject to the same process. 

Requiring Treasury approval of many inbound or outbound financial transfers would be enormously disruptive to international commerce (not to mention financial privacy).  But the most important aspect of foreign exchange controls is that the Treasury would convert dollars and foreign currencies at an official, fixed rate.  That rate may differ markedly from the market rate.

For instance, in Venezuela, the central bank trades U.S. dollars for "new" Venezuelan bolivars at the rate of 2.15 per dollar.  (The "old" bolivar was valued at 21,500 per dollar, so the government simply lopped three zeroes off.  This is something governments that impose foreign exchange controls to fight inflation do frequently.)  But on the black market, a dollar buys five or more bolivars.  The Venezuelan government forces its citizens to exchange foreign currencies for bolivars at less than half the market rate, or risk fines and imprisonment. 

Exchange controls always end up causing more problems than they solve.  The most serious problem is that the controls permit the government to continue irresponsible financial practices far longer than they would otherwise be able to do if not constrained by market forces.  In addition, graft and corruption always accompany foreign exchange controls.  Treasury officials and those with political connections always commit the most serious violations. 

Nonetheless, under his mandate for "change," President Obama may well decide to strengthen exchange controls further if the original ones aren't effective in preventing capital flight.  This initiative could take forms such as:

• Requiring that U.S. persons close all foreign bank accounts and repatriate the assets to the United States at the official exchange rate, unless the first apply for and receive a license to hold the account
• Prohibiting the purchase or sale of gold, and requiring the sale to the Treasury of privately-held gold at the official exchange rate
• Formally declaring a two-tiered currency conversion rate: a market rate for foreign purchasers of U.S. Treasury debt (perhaps backed by forcibly sold gold) and a below-market rate for U.S. residents.

Whatever the form foreign exchange controls take, you need to prepare for them.  I'll describe some steps you can take to protect yourself in my next blog entry.

Copyright © 2009 by Mark Nestmann