Asset Protection BLOG - Mark Nestmann

Can the Federal Government Literally Seize the Shirt off Your Back?

I'm a long-time critic of state and federal civil forfeiture laws.  These laws, supposedly derived from an obscure passage in the Bible, permit police to seize your property without ever charging you with a crime, much less convicting you of one.

Based on the flimsiest imaginable evidence (perhaps provided by a "confidential informant"), police can seize your bank accounts, security accounts, your vehicle—even your home—if it's allegedly purchased with, connected to or "facilitates" any one of more than 300 crimes.

And now, according to prosecutors, they can literally seize the shirt off your back.

Last month, federal prosecutors in California authorities filed an indictment charging 79 members of the Mongols, a West Coast motorcycle gang, with various racketeering, drug and money laundering offenses.  As is typical in organized crime cases, a key part of the indictment is a request for forfeiture of supposedly criminally derived assets. 

Among other assets the Feds want to seize is the Mongols’ trademark, which portrays a pony-tailed warrior with a handlebar mustache wearing sunglasses. According to Thomas O’Brien, the U.S. Attorney prosecuting the case, “If any law enforcement officer sees a Mongol wearing his patch, he will be authorized to stop that gang member and literally take the jacket right off his back.”

I can certainly appreciate O’Brien’s desire to shut down what the indictment describes as a tightly organized group routinely engaging in murder, torture, drug trafficking and other offenses.  But if the government can seize any article of clothing containing a Mongol patch, why can’t it then ban—and subsequently seize—other items containing unpopular symbols? 

I can think of numerous items that many people find objectionable: Confederate flags, Nazi swastikas, or robes worn by the KKK, among others.  Could the government ban ownership of these items based on an indictment of certain people who display them?  Or if the government decided to seize a popular retail brand like The Gap, could police fan out and start seizing teenagers’ baseball caps and T-shirts? Under O’Brien’s logic, the answer would be yes.

And there’s an additional problem: the Mongols don’t even own their trademark! Back in April 2008, the Mongols transferred its trademark to Shotgun Productions, LLC, a company that isn't even named in the indictment.

Until federal prosecutors brought this case, the government at least had to allege that your property was used for an illegal purpose. But in Thomas O’Brien’s world, you can lose your property simply because it has the wrong logo on it.

Civil forfeiture is one of the most insidious legal procedures ever devised by mankind.  I hope that the ramifications of this case give Congress an incentive to enact significant reforms, if not abolish it altogether.  It’s about time!

Copyright © 2008 by Mark Nestmann

How to Survive the Coming Economic Emergency [Part III]

In my last two blog entries, I described some of the powers the U.S. President has if he declares an “economic emergency.”  I also described one scenario that could lead to foreign exchange controls or even outright confiscation of wealth: a death spiral in the value of the U.S. dollar.

If you have property that you believe may be at risk for some future expansion of emergency or wartime controls, you still may legally take action to protect it.  Here are some ideas:

• Transfer funds outside the United States and outside the U.S. dollar.  It's still possible to legally transfer funds from the United States, but it may not be if the U.S. imposes foreign exchange controls. This could occur in the event of another terrorist attack on the United States, or if the U.S. dollar falls sharply due to a terrorist incident or financial panic.  That possibility may seem remote at the moment, because the U.S. dollar has appreciated sharply in the last few weeks in response to the global economic crisis.  But this gives U.S. investors a rare opportunity to invest offshore and convert their dollars to foreign currencies, or to gold, at the most attractive exchange rates in more than a year. 
• Use offshore structures to hold non-U.S. investments.  This strategy may not only provide protection against domestic judgments, but may also provide a legal means to avoid future foreign exchange controls.
• Hold investments that aren't subject to U.S. jurisdiction.  The most vulnerable investments are those located within the United States.  But as this report documents, foreign investments may also be vulnerable, particularly those denominated in U.S. dollars.  The least vulnerable foreign investments are foreign real estate and gold, silver or collectibles held outside the United States.  Certain contractual relationships, such as insurance contracts and trusts, may also be configured to avoid U.S. jurisdiction.
• Avoid electronic transactions in U.S. dollars through U.S. clearing networks. Most electronic transfers of U.S. dollars clear through a U.S. clearing bank and ultimately the Federal Reserve.  U.S. courts have ruled that funds involved in such transactions are subject to U.S. jurisdiction and thus to possible confiscation.  A growing number of countries have set up dollar clearing facilities to clear their own domestic U.S. dollar electronic transactions. Such foreign clearing networks are at far less risk from the U.S. legal system than U.S. clearing networks.
• If you’re a foreign investor with U.S. interests, assess your risk to U.S. emergency or war controls. Investors from any country accused of "sympathizing with" or "harboring" terrorists are at particular risk.  So are investors in countries or financial institutions through which terrorists have been accused of operating bank and trust accounts.
• U.S. persons not wishing to live under emergency controls are understandably interested in relocating to lower profile jurisdictions.  Many countries welcome affluent retirees or other financially self-sufficient persons.

The prospect of emergency financial controls may appear to be remote.  But as I described in Part I of this series, they’ve been imposed many times in U.S. history.  And, as this financial crisis deepens, they may be imposed once again.

Copyright © 2008 by Mark Nestmann

How to Survive the Coming Economic Emergency [Part II]

In my last blog entry, I described the awesome power of the U.S. President to under an “economic emergency.”  That authority includes, among other measures, the power to restrict or even prohibit the transfer of dollars outside the United States.

One possible scenario for emergency economic controls would be a run on the U.S. dollar. That may not seem likely given that the dollar has sharply appreciated in recent months.  However, that appreciation may not continue given the enormous sums of money the U.S. government has spent trying to deal with the ongoing and deepening financial crisis: over $1 trillion since the beginning of 2008, and increasing by hundreds of billions of dollars each month. 

At the end of 2007, the world's central banks held an estimated US$3.4 trillion in U.S. dollar reserves.  China holds the largest share—about US$1 trillion—followed by Japan with US$700 billion or so. 

In today's digital marketplace, dollar owners don’t hold them in cash, but in electronic form; blips on a computer screen.  Traders can buy (and sell) dollars by the billions at the click of a mouse.

As long as the value of the dollar is relatively stable, central banks are content holding trillions of them.  They earn interest on them by using them to purchase dollar-denominated assets such as U.S. Treasury bills. However, one or more of the central banks holding a few hundred billion dollars—or more—could suddenly decide to convert them to gold, or to other currencies.  Or a hedge fund manager could use options and derivatives to make a massive bet against the dollar, hoping to profit on the dollar's collapse. 

Whichever way it begins, a dollar selling panic would be expressed in many different ways.  A dollar sell-off would devastate foreign investors with a future claim denominated in dollars.  The value of dollar-denominated bonds and other financial claims would plummet as investors rush for the exits. 

A dollar panic would also seriously restrict all dollar-denominated international trade and commerce.  For instance, foreign persons owning property scheduled for future delivery to the United States (e.g., oil supertankers with cargos worth US$200 million or more) would likely refuse to accept payment in dollars. 

Faced with the worst financial crisis in its 200-year history, the U.S. government would certainly impose emergency financial controls.  Indeed, the public will demand that it do so.  And President Bush (or his successor) has many tools at his disposal to deal with such a crisis.  Besides those I mentioned in Part I, they include:

• Foreign exchange controls restricting the ability to convert U.S. dollars to other currencies
• Restriction on foreign investors seeking to repatriate dollar profits or investments to their home countries
• Restrictions on foreign investment as U.S. property become much less expensive in foreign currency terms.  (The controversy over the proposed purchase by a Dubai company of operating rights for several U.S. ports will seem mild by comparison).
• Restrictions on international travel
• Rationing of imported goods, especially gasoline and oi

This isn't a prediction, and I hope this scenario never develops.  But given the turmoil on the international financial markets, anything is possible. 

How can you adapt your portfolio to the ongoing economic emergency, and the prospect of a dollar selling panic?  My next installment will provide several suggestions you can put into place immediately. 

Copyright © 2008 by Mark Nestmann

How to Survive the Coming Economic Emergency [Part I]

As the global economy implodes, governments throughout the world have responded.  So far, that response hasn’t impressed global investors.  Stock markets are in free-fall, major banks collapse daily, and even creditworthy consumers and companies find it difficult to borrow money. 

In the United States, Congress, the Securities & Exchange Commission, the Treasury Department, and the Federal Reserve Board have imposed various emergency measures intended to shore up the economy.  Congress has approved a $700 billion Wall Street bailout, now enacted into law by President Bush. The SEC has banned short selling of financial stocks.  The Fed has exchanged hundreds of billions of dollars of banks’ distressed mortgage debt in for Treasury bills. 

However, we’ve only seen the tip of the iceberg when it comes to measures the government can impose to deal with the economic conditions we now face.  Today, without further legislation, the President can at the stroke of a pen declare a “state of national economic emergency” of potentially unlimited duration.  Once he does so, under existing law and precedent, he may:

• Impose a national banking "holiday" closing all U.S. banks or restrict and ration cash withdrawals and the cashing of checks or drafts.  President Franklin Roosevelt used this authority in 1933 to closet the U.S. banking system after a run of bank failures.
• Shut down all stock and commodity exchanges.  President Wilson invoked this authority in 1914 to shut down U.S. financial markets for four months.
• Impose punitive taxes on inbound or outbound foreign investments.  President Kennedy invoked this authority in 1962 to shrink U.S. capital deficits and support the U.S. dollar.
• Investigate, regulate, or prohibit the importing, exporting or holding of currency, securities or precious metals.  President Franklin Roosevelt used this authority in 1933 to order the sale of all privately held gold in the United States to the federal government.  President Nixon invoked similar authority in 1972 to end the ability of foreign central banks to exchange U.S. dollars for gold.

With few exceptions, the U.S. Supreme Court has repeatedly upheld such seemingly unconstitutional takings as a valid exercise of the president's war or emergency authority.

I don’t believe President Bush will assert any or all of these powers unless he feels that he has no choice.  However, one event that he won’t be able to ignore would be if the U.S. dollar were to suddenly and sharply decline in value. 

The dollar has sharply rebounded in value against other currencies in the last few months.  However, foreign central banks hold more than US$3 trillion in U.S. dollars.  You can imagine what might happen to the value of the dollar if these central banks begin selling dollars en masse.

What might set off a dollar panic?  I’ll address that in my next blog entry.

Copyright © 2008 by Mark Nestmann

(Find out more about how the government's emergency financial powers can destroy your hard-earned wealth, and how you can protect yourself.  Click here to learn more.)

The Terrorist Excuse for Global Financial Surveillance [Part IV]

In the first three segments of this series, I demonstrated how the global surveillance network of inter-connected “financial intelligence units” (FIUs) have utterly failed to meet their objectives of unearthing terrorist financing and other financial crimes. I also showed that the real purpose of this network is much more likely to facilitate asset forfeiture and politically motivated surveillance.  It has very little to do with uncovering criminal activity, although it may occasionally do so.

Financial intelligence agencies such as the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) place many persons at risk merely through the routine exercise of their business or profession.  If you or your business conducts foreign transactions, you face a higher likelihood of investigation, asset confiscation, etc.  That’s because foreign financial flows are of greatest interest to global FIUs.

If you conduct business with designated political enemies (e.g., persons or entities on "terrorist" or other watch lists), you face the highest risk of all.  Even if the transactions are perfectly legal, should you conduct them with political enemies of the United States or other powerful governments, you face draconian sanctions.

The United States has by far the world’s most sophisticated system of financial surveillance.  To avoid pervasive U.S. financial surveillance, I highly recommend offshore investments and relationships:

• Place a portion of your assets outside the United States.  The most private—but also the riskiest—investments are contracts with unregulated persons, not with financial institutions or trustees.  An example would be an agreement with a private individual in another country to manage an investment for you, in that person’s name.  While such relationships may be reportable and taxable, they’re the least likely to show up on the financial "radar screen."  You can also purchase some regulated contracts, such as insurance policies, in relative privacy. If you open a bank account, settle a trust, or form a company in your own name, you’ll be subject to greater surveillance.
• Transfer funds outside the U.S. dollar. It’s still possible to legally transfer funds from the United States, into alternative currencies.  Now may be an excellent time to do so as the dollar has appreciated sharply in recent months.   
• Use attorney-client privilege. Many countries (including EU members) now require attorneys to report "suspicious transactions" to their domestic FIU.  Keeping this requirement in mind, you can achieve considerable privacy by conducting business and financial transactions through an attorney. However, in virtually all jurisdictions, attorneys can’t provide advice that would result in or encourage the commission of a crime.
• Evaluate non-reportable offshore investments. Depending on where you live, certain offshore relationships or assets may not be legally reportable.  U.S. persons need not report assets held in a non-U.S. safety deposit box, where no foreign financial institution has legal custody of those assets. Other non-reportable offshore investments for U.S. persons include real estate, yachts, vehicles and other assets not considered a "foreign bank, investment or other financial account."
• Use cash. Despite the global crackdown on cash, you can still achieve significant privacy by using cash instead of debit/credit cards or checks. This is particularly true outside the United States. However, cash transactions (over US$10,000) are subject to substantial surveillance.  An increasing number of countries also require that you declare substantial sums of cash when crossing domestic frontiers.  Finally, most countries now require banks and other financial institutions to report suspicious cash transactions to the domestic FIU.

Copyright © 2008 by Mark Nestmann

The Terrorist Excuse for Global Financial Surveillance [Part III]

In my two most recent blog entries, I described how the United States and other governments have quietly erected a network of technology and law to eliminate financial privacy worldwide.  The most visible manifestation of this network are “financial intelligence units” (FIUs) such as the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), now linked to more than 100 similar FIUs worldwide.

I also described how this surveillance system has utterly failed at accomplishing its stated objective: to unearth terrorist financing and other financial crimes.

If FinCEN and other FIUs are useless to meet their stated objectives, what's their actual purpose?  I believe that purpose has nothing to do with unearthing illegal activity, although it may sometimes do so.  Instead, one unacknowledged objective of this network is to permit governments worldwide to conduct politically motivated surveillance.  Another is to identify assets for confiscation, thus creating a self-funding network of global surveillance.

Consider, for instance, how FinCEN could retaliate against an uncooperative congressional leader.  Has that individual ever made a financial transaction that exposed an embarrassing preference or illegal activity?  FinCEN and the global FIU network provides an ideal mechanism for blackmailing politically exposed persons—and anyone else.

There’s also no doubt that a global network of FIUs funded with forfeited assets creates the same conflict of interest that plagues U.S. civil forfeiture laws: the development of a worldwide bounty-hunter mentality. 

Seizures of narcotics, gambling equipment, nuclear materials, child pornography and other illegal commodities generate no revenues for law enforcement.  But seizing agencies keep up to 100% of the seized proceeds of the sale of such items, along with all property "involved in" such transactions.  Some of this bounty is now shared with FIUs.  Strong incentives thus exist for police to maximize property seizures by delaying arrests of persons engaged in illicit sales of narcotics or other illegal merchandise until they have sold all or most of their supply. 

It’s inconceivable that a global network of FIUs operating under these incentives will not be misused for political purposes or private gain.  Far from ending money laundering, the network will facilitate it.

This is already occurring in other "secure" government databases.  Columbian drug cartels have penetrated databases operated by the U.S. Drug Enforcement Administration.  The U.S. wiretapping system has been similarly compromised. 

Why should anyone expect FinCEN and its affiliate FIUs to be different?  Certainly, terrorists and drug kingpins would pay dearly for access to FIU databases.  Knowing what information FIUs have on their assets and laundering techniques, not to mention those of their competitors, would be extremely valuable.

These concerns aren't merely theoretical.  In 2002, the Chief Justice of the Cayman Islands accused the head of the island's FIU of wiretapping his telephone and destroying evidence that may have proven the innocence of a bank accused of money laundering.  Since FIUs are expected to generate revenues beyond their operating costs, corruption in the Cayman FIU may be only the first of many similar scandals to come.  The only reason why we haven’t learned of similar scandals in other countries is that FIUs are considered “intelligence agencies” with all operations shrouded in secrecy.

Even if you’re not a criminal, muckraking politician, or other person of interest to the global network of FIUs, worldwide surveillance of virtually all financial transactions may place you at risk merely through the routine exercise of your business or profession.  In my final installment of this series, I’ll outline some of the ways you can protect yourself from what can only be described as “global surveillance run amok.”

Copyright © 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

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

Government Stings: Don't Get Stung

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Copyright © 2008 by Mark Nestmann

The US Declares War on Iran (Part III)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Copyright © 2008 by Mark Nestmann