Lifeboat Updates

7/28/2019 Lifeboat Updates

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Copyright 2010 by Mark Nestmann. All rights reserved. Mark Nestmann and The Nestmann Group, Ltd. are not dealers or underwriters insecurities and are not engaged in the practice of law. Communications from Mark Nestmann and/or The Nestmann Group, Ltd. should not beconsidered personalized investment or legal advice. The information herein does not constitute a "written tax opinion" and may not be used to

avoid potential tax penalties.

Updates to The Lifeboat Strategy, 3d ed. (August 2010)

The 3d edition was published in October 2007. An interim update to the 3d ed. was pub-lished in February 2009.

Note: All page numbering refers to the THIRD edition of The Lifeboat Strategy (interim update 2009). The final

update for the SECOND edition is published athttp://nestmann.com/pdf/lifeboat_updates_1107.pdf.

p. 7In addition to the public records listed on this page, privatecompanies maintain records of many types of transactionsyou make with them. In most cases, these companies maydistribute these records as they see fit; you don't own them.

When you open a bank account, order a pizza, donate to acharity, register a product for a warranty, sign up for a"shopper's card" at a grocery, collect a rebate, or order in-formation out of a catalog, the information you disclose (al-though not your credit card number) may be shared. Insome states, even records of your medical prescriptions maybe shared.

p. 9There is a typographical error in the first word of the lastparagraph. Please substitute "one" for "once."

p. 14A recent trend in identify theft is for criminals to set uponline data warehouses of stolen personal data for sale toprospective data thieves. For those with access to suchwarehouses, identity theft is as easy as "point and click."1

p. 15

The INSPASS program has been discontinued. In its place,the U.S. Department of Homeland Security has initiated sev-eral "trusted traveler" programs to reduce border-crossingformalities. The main trusted traveler programs are the:

Global Entry Program (provides pre-approved, low-risktravelers expedited clearance upon arrival into theUnited States

NEXUS Program (provides expedited travel via land,air or sea to approved members between the U.S. andCanada border) and

SENTRI Program (provides expedited travel to ap-proved members between the U.S. and Mexico border)2

p. 15CCTV is much more effective at solving crime than prevent-ing it. One study from the United Kingdom, the countrywith the world's most pervasive CCTV network, shows thatstreet crime and violence is in most areas equipped withCCTV no lower than in areas without it.3 On the other hand,an internal investigation by Scotland Yard (the London po-

lice authority) concluded that seven out of ten murders aresolved using footage captured by CCTV cameras.4

p. 17In 2008, the FBI proposed a global network, through whichU.S. law enforcement and intelligence agencies would havedirect access to biometric information held in foreign data-bases. The proposal would, for the first time, expand thefive-nation UK-USA intelligence sharing agreement (Chap-ter 2) between the United States, the United Kingdom, Can-ada, Australia, and New Zealand, into regular law enforce-ment.5

p. 17

In 2008, President George W. Bush signed into legislationthat authorizes the federal to screen the DNA of all babiesborn in the United States. The official purpose of the data-base is for genetic research, but critics describe it as the firststep towards a national DNA databank.6 Beginning in 2009,under new rules from the U.S. Department of Justice, anyperson arrested in connection with any federal crime mustprovide a DNA sample.7 The FBI's national DNA databank,which already contains nearly 7 million profiles, is projectedto add about 1.3 million annually from federal arrestees andillegal immigrants alone.8

p. 25About half of U.S. states have abolished grand juries andreplaced them with a preliminary hearing before a judge.Federal courts still employ grand juries due to the constitu-tional requirement of the Fifth Amendment.

pp. 31-32All 50 states have agreed to participate in the U.S. Depart-ment of Homeland Security's "Real ID" initiative to develophigh-tech driver's licenses. However, no state has yet im-plemented these requirements, and all 50 states have beengranted extensions from the original 2008 deadline.9

pp. 32-33The $50 billion Ponzi Scheme masterminded by investmentmanager Bernie Madoff proves beyond any reasonable doubtthat the SEC is unable to prevent even the largest investorfrauds. The Madoff affair occurred despite the fact that theSEC was warned on numerous occasions, beginning morethan a decade ago, that the investment returns claimed byMadoff were impossible to achieve by any legitimatemethod.10


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Copyright 2010 by Mark Nestmann. All rights reserved. Mark Nestmann and The Nestmann Group, Ltd. are not dealers or underwriters in securities and are notengaged in the practice of law. Communications from Mark Nestmann and/or The Nestmann Group, Ltd. should not be considered personalized investment or legal

advice. The information herein does not constitute a "written tax opinion" and may not be used to avoid potential tax penalties.

2

Madoff's decades-long success in avoiding detection under-scores the political pressures placed upon the SEC by thoseit purports to regulate. It is incomprehensible that the SECwas unaware of Madoff's scheme, but nothing was done dueto his immense political influence.

p. 35

The weakening economy has led to an explosion in creditrepair scams. There is no way to "instantly" repair yourcredit. You can improve your credit score legitimately, butit takes time, a conscious effort, and sticking to a personaldebt repayment plan.

p. 36ChoicePoint has now been acquired by LexisNexis.

pp. 38-39The "Obamacare" medical care law signed into law byPresident Barack Obama in 2010 initiative calls for allAmericans to be issued a machine-readable identificationcard through which medical data on each citizen would becollected, catalogued and transmitted to the Department ofHealth and Human Services. The goal is to obtain real-timeconfirmation of which medical services you qualify for andhow much you will have to pay. If you want medical care,you'll need the ID card.

Under the "surveillance creep" principle I wrote about inChapter 1, it's easy to predict what happens next. Yourhealth ID card will soon come to be used to identify you forother purposes. Eventually, it could contain informationabout your tax status, your bank accounts, and your criminalhistory.

p. 39In 2006, Congress enacted legislation that legalizes the shar-ing of genetic information among the more than 800,000HIPPA-authorized entities described on this page. You neednot be informed of such sharing and have no right to opt outof it.11

pp. 40-42In 2008, in response to a request under the Freedom of In-formation Act, the U.S. Postal Service released limited dataon mail covers. Each year, the Postal Inspection Serviceapproves more than 10,000 mail covers. Nor is it applying aparticularly rigorous standard of review. From 2004-2006, itapproved more than 99.5% of mail cover applications.12

p. 44In 2009, federal and state courts issued 2,376 orders for theinterception of wire, oral or electronic communication. Thiscompares to 1,891 wiretaps authorized in 2008, a 26% in-crease. As in every year since 2005, the courts denied nowiretap applications.13

According to the 2009 Wiretap Report, the most commonlocation specified in wiretap applications was a "portable

device, carried by/on individual." This accounted for 96%of wiretaps authorized. The overwhelming majority of appli-cations for intercepts cited a drug offense as the most seriouscrime under investigation.

The Foreign Intelligence Surveillance Court authorized an-other 1,376 national security and foreign intelligence relatedwiretaps in 2009, down from 2,083 in 2008.14 A streamlined

application process for intelligence related wiretaps de-scribed later in this chapter appears to be the reason why thenumber was so much smaller in 2009 than in 2008. Onlyone application was denied in 2009.

pp. 47-48In 2008, Congress enacted "compromise" legislation thatmakes most provisions of the Protect America Act perma-nent.15 The bill amends the Foreign Intelligence Surveil-lance Act (FISA) to give the NSA greatly expanded author-ity to carry out wholesale "data mining" of e-mail communi-cations, telephone calls, faxes, etc., without obtaining asearch warrant.

The only role of the courts under the new FISA law is toapprove the computer algorithms the NSA uses to decidewhich messages merit further investigation. The amend-ments shift the decisions about which U.S. citizens to spy onfrom the courts to NSA technicians operating in secret andcreating surveillance algorithms that only they understand.

The law also grants retroactive immunity to the telecomcompanies that cooperated with NSA eavesdropping afterthe attacks of Sept. 11, 2001.16

Shortly after the enactment of these amendments, the For-eign Intelligence Surveillance Court of Review ruled that

warrantless e-mail and telephone surveillance by U.S. fed-eral agencies does not violate the U.S. Constitution.17 Thedecision implicitly validates the amendments to FISA con-tained in the Protect America Act.

pp. 47-48The Obama administration claims even more sweeping pow-ers of warrantless electronic surveillance than that of GeorgeW. Bush. The Obama White House, which swept intopower promising to overhaul warrantless surveillance policy,now claims that government "is completely immune fromlitigation for illegal spyingthe Government can never besued for surveillance that violates federal privacy statutes."18

pp. 49-50Delete last paragraph before "E-Mail and Cellular PhonesHave Little Privacy Protection" (continuing to p. 50) andinsert in its place:

Hundreds of companies buy and sell private telephone re-cords. One of the most frequently used strategies to obtainsomeone's phone records is to impersonate that person.Such 'pretexting' is now illegal in some states, but persists.


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A proposed federal law would ban pretexting for obtainingtelephone records, but would forbid the practice only byprivate companies. Government agencies could continue tofreely impersonate you to obtain your telephone records.19

p. 49The Obama administration has now acknowledged the gov-ernment needs to first obtain a search warrant before seeking

to retrieve stored e-mail messages on Yahoo! or Internet-based e-mail services.20

pp. 49-50

Law enforcement agencies now routinely seek real-timetracking data from cell phone companies so they can pin-point the whereabouts of criminal suspects. In many cases,no warrant is necessary to obtain this data.21

pp. 49-50

There's also a risk to your cell phone data if you're arrested.Numerous federal and state courts have ruled that you havelittle or no "expectation of privacy" in this situation. In moststates, if you're arrested, police have the right to confiscate

your cell phone, copy everything on it, and use any evidencegathered in this manner against you.22

pp. 51-52Some data security experts believe that within a few years,perhaps sooner, there will be a data security "meltdown"event that will lead to the enactment of an "e-Patriot" Act.23It will likely include provisions previously introduced, butrejected due to civil liberties concerns. These include:

Mandatory disclosure of encryption keys andpassphrases after a court order or other legal process.

Prohibition of anonymous e-mail accounts.

Mandatory retention of e-mail logs and Web surfinglogs by Internet Service Providers.

Mandatory use of "Internet ID cards" to access theInternet.

The FBI is already pressuring Internet service providers torecord which Web sites their customers visit and retain thoselogs for a minimum of two years. It also wants to require"authentication" of Internet users "origin and destinationinformation."24

pp. 54-56

The official name of the Cybercrime Treaty is the Council ofEurope's Convention on Cybercrime.

p. 65The IRS has published new procedures under which infor-mants may claim rewards of up to 30% of additional tax,penalties and interest owed. To be eligible for an awardunder the new procedures, the tax, penalties, interest, addi-tions to tax, and additional amounts in dispute must exceed$2 million for any taxable year.25

pp. 67-68The "structuring" statute is not often used to prosecutemoney laundering, but a structuring investigation may haveended the career of former New York governor Elliot Spitzerin 2008. Spitzer apparently withdrew more than $10,000 incash from his bank account in a series of "related" transac-tions. That apparently set alarm bells off in the bank's soft-ware used to identify "suspicious transactions" in customer

accounts.26 However, prosecutors declined to bring structur-ing charges against Spitzer.27

pp. 70-71

Publication 1544's definitions of monetary instruments anddesignated reporting transactions have been revised. Seewww.irs.gov/pub/irs-pdf/p1544.pdffor the most recent defi-nitions.

p. 75In 2008, the Supreme Court ruled that federal law enforce-ment officers are immune from lawsuits for mishandling,losing, or even stealing personal property that comes undertheir control in the course of their official duties.28 Whilethe case did not involve a civil forfeiture, similar rules wouldpresumably applied to this often-abused legal procedure.

pp. 75-79As the economy sours, and governments are forced to cutback spending, civil forfeiture is an increasingly attractiverevenue stream. In at least one state, the U.S. military isparticipating and receiving their share of the spoils. Colo-rado law now designates the Colorado National Guard as a"law enforcement agency" for the purpose of participating inasset forfeitures conducted pursuant to federal law. Whenthe Guard helps to investigate or otherwise assist in suchcases, it shares in the revenues. In 2008, the Guard received

its first check, for $93,701.29

p. 80The Civil Asset Forfeiture Reform Act of 2000 (CAFRA)didn't change the procedures for all types of forfeiture cases.The reforms exclude cases brought under forfeiture statutesrelating to Customs offenses, some types of tax offenses,food/drug/cosmetic offenses, and offenses relating to theTrading with the Enemy Act.30 For the vast majority of fed-eral forfeiture statutes, however, CAFRA's provisions apply.

p. 80Hearsay evidence is no longer admissible in a civil forfeitureproceeding under CAFRA.

p. 80The Patriot Act escalated the War on Cash to a new level bycreating a new crime, "bulk cash smuggling."31 This provi-sion applies to punish those who fail to abide by the BankSecrecy Act's requirement to inform the Treasury Depart-ment when they transport more than $10,000 in currency orcurrency equivalents across a U.S. border. Violators aresubject to confiscation of their funds plus a five-year prisonsentence.


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p. 84Delete the paragraph beginning with "The law relating to thepretrial restraint" and replace it with:

The law relating to the pretrial restraint ofsubstitute-untainted assets in criminal forfeiture cases is not settled.In most judicial districts, prosecutors may not restrain substi-

tute-untainted assets before conviction or even trial. 32 Butin the Fourth U.S. Circuit, comprising Maryland, West Vir-ginia, Virginia, North Carolina, and South Carolina, prose-cutors may use this tactic.33 The Supreme Court may even-tually be called upon to settle this issue.

pp. 85-88In 2008, the Supreme Court injected a small element of san-ity into the money laundering law. In two decisions, thecourt concluded:

The mere fact that money is "concealed" does not vio-late the money laundering statute. The governmentmust also prove that the concealment was designed tohide the source, ownership, or control of the money.34

The "proceeds" of a money laundering crime should beinterpreted to mean profits and not gross receipts.35

Taken together, these decisions significantly restrict thereach and scope of the money-laundering statute. One prac-tical effect is that you can no longer be prosecuted formoney laundering merely for hiding cash at home, in asafety deposit box, or in your vehicle. But more signifi-cantly, the decisions mean that the government won't be ableto convert garden-variety financial crimes into money laun-dering prosecutions.

Congress, of course, can amend the law to specifically makeit a money laundering offense to "hide money." It could alsoredefine "proceeds" as "gross receipts."

pp. 86-90While there is no private cause of action under the moneylaundering laws, plaintiffs frequently allege money launder-ing in civil lawsuits. The intent is to force a favorable set-tlement so that the allegations don't lead to a criminal inves-tigation of the defendant. This can be an extremely effectivelitigation strategy.36

pp. 93-94

As part of the Egmont Group initiative (p. 269), FinCEN hassigned Memoranda of Understanding (MOU) or obtainedother written agreements with other FIUs to help identifyforfeitable property. FinCEN has an MOU or a writtenagreement in effect with the FIUs in more than 100 coun-tries.37

pp. 95-96One of the most severe sanctions of the Patriot Act is Sec-tion 311, which permits the United States to freeze the U.S.

assets of any foreign bank that has correspondent banking orother substantial relationships with specific banks adminis-tratively designated as being guilty of money laundering.This authority essentially permits the United States to de-clare a financial war against an entire country, without anylegislative authorization.

In 2008, the Treasury Department issued a "financial advi-

sory" dealing with Iran. The advisory essentially warned theworld's banks that if they do business with Iran, the U.S.Treasury could seize their U.S. assets. All the governmentneeds to do so is to prevail in a secret civil forfeiture hearingin which the targeted bank has no right to participate.38

p. 97In 2008, a federal appeals court narrowed the standard underwhich the FBI can impose a gag order. The NSL recipientmust keep the letter secret only if the FBI certifies that dis-closure of the NSL "may result in an enumerated harm thatis related to an authorized investigation to protect againstinternational terrorism or clandestine intelligence activi-

ties."39

Before then, citing a criminal investigation wasenough to impose a gag order.

pp. 97-98"A License to Snoop" refers to two separate investigativeprovisions of the Patriot Act. The NSL provisions summa-rized on page 97 apply to telephone logs, e-mail logs, finan-cial and bank records, and credit reports. 40

Another provision of the Patriot Act permits the ForeignIntelligence Surveillance Court (FISC) to grant warrants torecover "business records."41 This authority is broader thanNSLs, which (in the case of the Patriot Act) are generally

restricted to telecommunications and credit records. In orderto obtain FISC sanction for this type of warrant, the govern-ment must demonstrate that the records are relevant to aninvestigation of foreign intelligence gathering and/or terror-ism. While the investigation may not be conducted solely onthe basis of activities protected by the First Amendment, theinvestigations of library patrons summarized on page 97were the result of this provision.

pp. 103-104Amendments in 2009 significantly increase the scope andapplicability of the False Claims Act while eliminating cer-tain previous legal defenses to FCA violations.42

pp. 104-105In 2008, the U.S. Army announced the first deployment of acombat brigade within U.S. borders since the end of theCivil War. The 3rd Infantry Division's 1st Brigade CombatTeam will function as an "on-call federal response force fornatural or manmade emergencies and disasters, includingterrorist attacks." The deployment weakens the Posse Comi-tatus Act to near-insignificance, as the government appar-


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ently plans to use the brigade for law enforcement purposessuch as "crowd control."43

p. 110In 2007, legislation increasing civil and criminal penaltiesfor violations of the International Emergency EconomicPowers Act (IEEPA) came into effect. Civil penalties in-crease from $50,000 to $250,000 per violation, or twice the

amount of the violating transaction. Criminal penalties in-creased to $1 million per violation. Prison terms of up to 20years remained unchanged.

pp. 110-111As the global economic crisis deepens, will President Obamause IEEPA to impose foreign exchange controls or otheremergency measures over the U.S. economy? Most coun-tries that impose exchange controls impose them in an effortto support the value of their national currency. And that'show they're likely to come to the United States. Should theU.S. dollar rapidly lose value in some future crisis, the pub-lic will demand that the government "do something" to de-fend the greenback's value. This sets the political stage for

exchange controls. And, the IEEPA makes it perfectly legal.

pp. 111-115In 2001, lawyers in the former Bush administration created alegal rationale to support the proposition that the FourthAmendment protection against unreasonable searches andseizures domestically didn't apply to its efforts to protectagainst terrorism. The administration later disavowed thislegal reasoning.44

p. 113

In 2010, the European Commission finalized an agreementfor an extension of the TFTP monitoring program45

pp. 113-114In 2009, President Obama temporarily suspended the mili-tary tribunals authorized by the Bush administration, prom-ised to close the Guantanamo Bay facility, and pledged toenforce international conventions signed by the UnitedStates that prohibit torture with respect to terrorist suspects.46

However, Obama has also not acted on his campaign pro-posal47 to amend the Military Commissions Act, which ar-guably repeals the constitutional principle ofhabeas corpus.Nor has he reversed any of the electronic or financial sur-veillance initiatives of the Bush administration.

p. 121

In 2008, the Recording Industry Association of Americaannounced it would stop suing consumers over illegal musicdownloads via the Internet. This is an abrupt shift of strat-egy for the RIAA, which brought legal proceedings againstmore than 35,000 defendants between 2003 and 2008.48

p. 130Under the "search incident to arrest doctrine," the SupremeCourt has held that police can search someone they are ar-resting. Even if the arrest is based on an expired or other-

wise defective warrant, evidence seized in the search can beused against you.49

Police may also open any "containers" you have in yourpockets or otherwise are carrying. This is true even if noprobable cause exists that the containers contain anythingillegal. In an increasing number of cases, the "container" isyour cell phone or other portable electronic device.50

p. 131

In 2008 a second federal appeals court declared that borderofficials may copy the contents of laptop PCs or other elec-tronic devices in your possession when you cross a U.S.border, even if they have no evidence of criminal activity.51And in 2009, a federal judge ordered a criminal defendant ina child pornography investigation to divulge his encryptionpassphrase so prosecutors can view the unencrypted files onhis hard disk.52 The Homeland Security Administration hasnow released official guidelines under which customs offi-cials can seize and search portable electronic devices.53

p. 139

Replacing the SIM card on an unlocked cell phone will de-feat casual surveillance by customs officials and other busy-bodies, but your phone will still transmit a unique identifica-tion number every time you use it. This "Information onSerial Number" (IMEI) is maintained in a global central da-tabase accessible to law enforcement agencies worldwide.

p. 140The services described on this page from Jangl and Pri-vatePhone are no longer available. J2 Connect is now a pay-only service, thus making its anonymous use impossible,unless you subscribe through a debit card you purchaseanonymously with cash.

p. 140Hushmail (http://www.hushmail.com) now acknowledgesthat the company will eavesdrop on its users when presentedwith a valid court order. In 2007, in response to a Canadiancourt order, Hushmail provided 12 CDs of emails to U.S.officials investigating the marketing of steroids.54

p. 141In 2008, an Austrian government official revealed that moni-toring conversations made through the Skype VOIP networkpresents "no particular problems."55 There is no reason tobelieve that police in other countries aren't already monitor-ing conversations made through Skype.

p. 141Zfone is now compatible with the popular "MagicJack"VOIP product (www.magicjack.com).

p. 142Anonymizer Dialup service is no longer available.

p. 1437. The Diclave service has been acquired by CryptohippieUSA (www.cryptohippie.net).


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pp. 146-147"Google Health" and a handful of other companies now offerconsumers the ability to organize their medical recordsonline, where caregivers can access it instantly. However,Google's Terms of Service for this offering give the com-pany the right to share your data with a variety of groupsunrelated to health care professionals, including the U.S.government. Avoid such services, despite their promised

benefits.

p. 147For 2010, the maximum HSA contribution for an eligibleindividual with self-only coverage is $3,050, and the maxi-mum contribution for family coverage is $6,150.

pp. 148-149States may no longer issue driver's licenses displaying yourSocial Security number. If your current drivers license listsyour SSN, your state must grant your request to issue you anew license that doesn't display it.

p. 151There is no legal requirement to file a currency transactionreport if you keep more than $10,000 in currency in a U.S.safety deposit box. However, I still don't recommend keep-ing currency there for the reasons listed on this page.

pp. 154-158The Tax Relief and Health Care Act of 2006 increased thepenalty for filing a "frivolous" tax return from $500 to$5,000. Some examples of frivolous returns include: failingto sign the return; taking the position that the Constitutionforbids imposition of a federal income tax; or filing a taxreturn with zeros entered on every line, even though youhave taxable income.

p. 155Replace item #3 with:

3. Understand the rules for charitable deductions. Youmay deduct charitable contributions only if you itemize de-ductions and contributed to organizations that qualify as chari-ties under IRS rules. You can't deduct a monetary contribu-tion, regardless of the amount, unless you have a bank recordor written communication from a charitable organization con-firming its receipt. For non-monetary (non-cash) contribu-tions, the rules are even stricter. At the minimum, you'll needa written acknowledgment from the qualified organization.

For larger non-monetary contributions, you may need to ob-tain a professional appraisal of the property to deduct itsvalue. For more information on charitable contributions,refer to IRS Publication 526.56

p. 156

Replace item #9 with:

If you think something in your tax return could lead to an

audit, submit Form 8275 with your return.57 Form 8275 isa disclosure statement that calls IRS attention to the item inquestion. If you fully disclose your position on the returnitself, and explain to the IRS how you arrived at it, you cangenerally avoid penalties. Deductions that arouse IRS scru-tiny, and for which disclosure via Form 8275 may be appro-priate, include moving expenses, medical expenses, charitable

contributions, entertainment expenses and home office ex-penses. To avoid penalties, your return position must have areasonable basis.

However, filing Form 8275 will not avoid penalties imposedfor negligence, disregard of IRS regulations, substantial un-derstatement of tax in a tax shelter, certain substantial valua-tion misstatements, or any substantial overstatement of pen-sion liabilities.

p. 158Replace item #19 with:

Understand IRS voluntary disclosure policy. IRS policyencourages taxpayers to "voluntarily disclose" tax violations.In exchange for coming forward, the IRS generally won'tcriminally prosecute you. You must still pay all applicableback taxes, interest, and penalties. However, voluntary disclo-sure isn't available if the IRS has already notified you of anaudit or investigation. It also doesn't apply to non-tax crimi-nal violations the IRS uncovers. Chapters 5 and 6 containdetails of past IRS voluntary disclosure programs for undis-closed offshore accounts and income.

Many taxpayers believe that by making a voluntary disclo-sure, the IRS relinquishes the right to criminally prosecute

them. This is incorrect. According to theInternal RevenueManual:

[A] voluntary disclosure will be considered along with all

other factors in the investigation in determining whether

criminal prosecution will be recommended. This voluntary

disclosure practice creates no substantive or procedural rights

for taxpayers, but rather is a matter of internal IRS practice,

provided solely for guidance to IRS personnel. Taxpayers

cannot rely on the fact that other similarly situated taxpayers

may not have been recommended for criminal prosecution.58

pp. 161-162If you can't pay the tax you owe to the IRS, one option is to

apply for an "offer in compromise" (OIC). This is an offerto pay the IRS an amount less than the total you owe to settlethe debt in full. You must file all tax returns due and deposit20% of the sum you plan to offer before applying for anOIC.59

p. 165In 2008, Nevis-based E-Gold pleaded guilty to money laun-dering charges.60


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p. 167Replace the second sentence on this page with:

Dealers must report sales by customers (but not purchases)that equal or exceed minimum Commodity Futures TradingCommission certified contract sizes to the IRS on Form1099-B.

p. 170If you're sued, and your legal advisors believe the plaintiffhas a valid claim, it may be best to settle out-of-court. Notonly does reduce possible damages a jury would award, itavoids a possible tax liability if you experience a judgmentthat is later reduced through post-trial settlement negotia-tions. After a judgment is rendered, there is a debt and anyreduction through negotiation represents taxable income.

p. 170The vast majority of asset protection plans won't protect youfrom tax claims. The IRS can seize the equity in your homeregardless of any homestead exemption, the cash value in alife insurance policy, and most retirement accounts. If youcreate an offshore structure to hide assets from the IRS, theagency may respond by requesting a court order to incarcer-ate you for contempt until you repatriate the assets.

p. 171The estate tax temporarily ended in 2010. Absent congres-sional action it will revert to a $1 million exemption in 2011.

pp. 171-172

Documents you submit to your attorney don't automaticallybecome privileged. It may be possible to prepare a summaryof what a document says for the specific purpose of commu-nicating that information to your attorney. In this situation,

the summary you prepare may be covered by attorney-clientprivilege.61

pp. 171-172New guidelines from the U.S. Department of Justice reducethe likelihood that a business under criminal investigationwill be asked to waive attorney-client privilege with respectto its employees' communication with attorneys paid for bythat business.62 However, the safest course is still to alwayshire your own attorney.

pp. 171-172E-mail communication can compromise attorney-clientprivilege. To preserve it, use a computer to which only youhave access to communicate via e-mail with your attorney.This avoids any claim that your communications aren't pro-tected by attorney-client privilege because other people hadaccess to your computer. In addition, encrypt all e-mailcommunication between you and your attorney. This dem-onstrates you had the intent of communicating confiden-tially.63

p. 172

As a result of the requirements of Circular 230 (Chapter 2),obtaining reliance opinions in tax matters has become muchmore expensive. More often than not, your attorney or taxadvisor's advice will include a disclaimer that the advicedoesn't constitute a "covered opinion." This disclaimermeans that you can't depend on the advice to avoid criminalor fraud penalties.

p. 174Using a fictitious name will not shield you from personal li-ability for business debts. To protect your personal assets, youmust form a separate business entity, such as a limited liabilitycompany or corporation. Both are discussed in Chapter 4.

pp. 174-175Additional suggestions to avoid having an independent con-tractor classified as an employee include:

Using a written contract to define the contractor's re-sponsibilities

Filing an Independent Contractor form with authorities

in your statepp. 176-177An often-overlooked source of liability is a falling-out withbusiness partners. Have your attorney create a buy-sellagreement to deal with possible conflicts between partners.One frequent source of disputes the agreement should ad-dress is under what conditions partners can be forced to selltheir interests and at what price. Another potential flash-point is the transfer of ownership upon the death of a part-ner.

If you provide goods on consignment to customers, haveyour attorney review the consignment contract to clarify that

the consigned goods remain your property until you're paid.Absent this precaution, if your customer becomes insolventand declares bankruptcy, you may find your customer'screditors have rights superior to yours in the value of theconsigned goods.64

pp. 177-178A good way to beef up liability insurance protection inex-pensively is to purchase an "umbrella" policy. With thistype of policy, coverage kicks in only after you've reachedthe limits of your primary liability insurance. Coverage upto $5 million is readily available in most states.

p. 179

Change the first sentence in the last paragraph on this pageto read: "LLCs formed in a U.S. state are popular vehiclesfor foreigners to invest outside the United States."

pp. 181-182If you own a single-member LLC, the IRS can seize yourpersonal property for tax debts owed by the LLC. A tax levyserved by the IRS on a LLC extends to property or rights toproperty belonging to the LLC's sole owner.65


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pp. 181-182Asset protection planners often recommend forming single-member LLCs in states where the charging order is the ex-clusive remedy available: Alaska, Nevada, New Jersey, andOklahoma.

pp. 182-183The estate tax temporarily ended in 2010, and will revert to a

to $1 million exemption in 2011 absent congressional action.pp. 182-183The Obama administration's 2011 budget proposal wouldeliminate some valuation discounts associated with familylimited partnerships and limited liability companies.66

pp. 182-183Limited partnerships (LPs) are used more often than LLCsfor estate planning purposes. One reason is that LPs havebeen around for a longer period and thus have a longer trackrecord in the courts. Another reason is that with a LP, it'seasier to separate ownership from control than with a LLC.Unlike the managing member of a LLC, the general partnerof a partnership has full liability for activities of the partner-ship by virtue of the various state statutes authorizing limitedpartnerships.67

p. 184To preserve asset protection in a LLC, certain formalities arenecessary, although not to the degree of a corporation. Inparticular, some states require you to conduct an annualmeeting for the LLC and document the meetings with min-utes. Other requirements may also apply.

pp. 185-186Legislation introduced in Congress would require that all 50states obtain the names and proof of identity of the benefi-cial owners of any corporation or limited liability company

(LLC) formed under that state's laws. This informationwould be available to law enforcement authorities upon re-ceipt of a subpoena or summons.68

p. 189A spendthrift trust offers even greater asset protection for itsbeneficiaries after the death of the person that created it.Instead of giving beneficiaries outright gifts, use the trust asthe vehicle for the gift.

pp. 190-191A total of 10 states have now enacted domestic asset protec-tion trust (DAPT) legislation. Offshore APTs (Chapter 5)still offer stronger asset protection than DAPTs. However,enough states have enacted DAPT legislation that the protec-tive aspects of these laws seem less radical than they didwhen they were introduced in the 1990s. Among other con-sequences, this is likely to make it more difficult for credi-tors in a non-DAPT state to successfully enforce a judgmentagainst property in a DAPT state, especially if a resident ofthe DAPT state owns the property.69

pp. 192-194If you borrow money from a commercial lender and thelender later cancels or forgives the debt, you may have topay income tax on the amount cancelled. A 2007 law ex-empts mortgages on a principal residence from this tax.Bankruptcy may also eliminate this tax.

p. 193

The federal bankruptcy exemptions were revised in 2010.The new exemption limits are published athttp://www.thefederalregister.com/d.p/2010-02-25-2010-3807.

p. 195Replace $136,875 with $146,450 in the first full paragraphin two places.

p. 195A residence you own through a revocable living trust mayalso qualify for a homestead exemption in your state.

p. 197Intentionally defective grantor trusts are also used to holdassets other than real property.

pp. 199-200ERISA-qualified retirement plans aren't exempted fromspousal and child support claims, claims from the IRS70 orfederal judgments. Retirement plan benefits may also besubject to attachment for federal criminal penalties or resti-tution.71 IRAs may be seized in criminal forfeiture cases.72

Outside bankruptcy, there is considerable variation state-to-state as to whether retirement funds are protected. Moststates protect assets in an ERISA-qualified plan or IRA fromjudgment creditors. This protection may or may not apply to

rollover IRAs.

Another exception applies to assets in a SIMPLE IRA orSimplified Employee Pension (SEP) IRA. These types ofplans may not be protected from creditors outside bank-ruptcy, regardless of state law protections.73 Rolling over aSIMPLE or SEP IRA into a traditional or Roth IRA mayrestore these protections.

p. 201Attacks on offshore centers and offshore investments con-tinue to intensify. President Obama has stressed that hewishes to "shut tax havens down."74 However, even themost vociferous opponents of offshore investments oftenhave their own offshore "nest egg." Case in point: CharlieRangel (D-N.Y.), the Chairman of the powerful U.S. HouseWays and Means Committee that writes all of America's taxlaws. Since 1988, Rep. Rangel has owned a luxury beach-front home in the Dominican Republic. But he admits thathe never reported nor paid taxes on over $75,000 in rentalincome the home earned him.75


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p. 201-202Emerging market economies experienced a sharp contractionin 2008, although many of them rebounded in 2009. Thelargest emerging market economiesChina and Indiaarestill growing much faster than the United States.

p. 205The latest effort to impose extraterritorial jurisdiction over

offshore service providers is the Hiring Incentives to RestoreEmployment (HIRE) Act. Enacted in 2010, the act expandsupon the qualified intermediary requirements by extendingwithholding taxes to many other types of U.S. income andgross sales proceeds. The only way to avoid the tax is forthe foreign institution to enter into an information reportingagreement with the IRS. This provisions come into effect onJan. 1, 2013.76

p. 205As pressure from the IRS and other U.S. government agen-cies intensifies, a growing number of offshore banks andservice providers are refusing to conduct business with U.S.persons. In some cases, offshore banks have forced long-time U.S. clients to close their accounts. For instance, Swissbanking giant UBS announced in 2009 that it would closemore than 19,000 accounts owned by U.S. investors.77 Thistrend makes the techniques to avoid offshore investmentrestrictions described on this page even more important.

Numerous offshore banks that still accept U.S. business nolonger accept investment instructions originating in theUnited States. A U.S. person with an account in such a bankmust either have instructions mailed or faxed from anothercountry, or make a personal visit. In some cases, offshorebanks will not permit U.S. investors to purchase any securitythat is not registered to trade on a U.S. exchange. This, of

course, greatly reduces the usefulness of an offshore bankaccount.

p. 209-210The mark-to-market election for PFIC holdings is availablenot only for closed end funds, but also for open-end fundswith shares traded on a daily or near-daily basis on a majorsecurities exchange.

pp. 209-210For U.S. tax purposes, a PFIC is not only a foreign corpora-tion, but also any foreign entity taxed as a foreign corpora-tion.

p. 210U.S. investors in offshore funds must file Form 8621 foreach year they hold the fund.

p. 210

Even if you have no offshore investments, you may still besubject to the PFIC rules. Numerous funds traded on U.S.exchanges are organized outside the United States, and manyof these funds are PFICs. Fortunately, most foreign funds

trading on U.S. exchanges provide sufficient information toU.S. shareholders that those investors' income or gain canqualify for QEF treatment.

p. 212Minimums for offshore portfolio management have in-creased. A realistic minimum investment is now $500,000or more. Some offshore banks reduce this minimum to

$100,000 or even less for depositors willing to have theirassets invested in a portfolio of offshore mutual funds. U.S.investors should generally avoid offshore mutual funds be-cause of the tax problems discussed on pp. 209-210.

p. 214In some countries it is not possible to name a beneficiary toreceive the proceeds of an offshore account upon the deathof the account-holder. In that situation, one option is to holdthe account in the name of an offshore entity that does notterminate on the owner's death. Another option is to havethe beneficiary become a co-signer on the account. In allcases, succession planning should be integrated with gift andestate planning to avoid unfavorable tax consequences upon

transfer of the account to the beneficiary or beneficiaries.

p. 215The anti-offshore vendetta now underway in most high-taxcountries is designed to eliminate bank secrecy in low-taxcountries respect to foreign tax investigations. U.S. personsin particular, but increasingly residents of other high-taxcountries, can no longer count on bank secrecy to shieldtheir offshore dealings from tax authorities at home. This istrue both for ordinary and numbered accounts.

p. 217For the paragraph beginning, "For a corporate account," in-sert the following sentence at the end of the first sentence:

"Each authorized signatory will need to present proof ofidentity and residence address."

pp. 220-23In 2008, the U.S Treasury Department introduced a newversion of Form 90-22.1. This reporting form has becomeincreasingly important because of ongoing and intensifyingIRS investigations involving U.S. persons with unreportedoffshore bank accounts.

Instructions to the new form make it clear that a U.S. personwho establishes a foreign trust or trust-like structure such asa foundation must file a report. Debit card and prepaid

credit card accounts are also reportable. However, individ-ual securities (stocks, bonds and notes) are not "financialaccounts," and an unsecured loan to a foreign business (otherthan a financial institution) does not trigger the filing re-quirement.

The instructions also extend the filing requirement to anyperson "in or doing business in the United States" withoutregard to citizenship. This requirement appears to require


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any foreign individual with business interests in the UnitedStates to disclose to the U.S. Treasury details of all non-U.S.accounts. The IRS has suspended this aspect of the account-reporting requirement until June 30, 2011.78

In 2010, the Financial Crimes Enforcement Network (Fin-CEN), discussed in Chapter 2, issued proposed regulationsthat go further than even the HIRE Act in mandating disclo-

sure of foreign financial relationships. If these regulationsbecome effective, U.S. persons must also report:

All foreign insurance policies with cash value.

All foreign annuity policies.

All foreign accounts with brokers or dealers for fu-tures or options transactions in any commodity onor subject to the rules of a commodity exchange orassociation.

All foreign accounts with mutual funds or similarpooled funds that issues shares available to the gen-eral public with a regular net asset value determina-tion and regular redemptions.

All foreign accounts "with a person that is in thebusiness of accepting deposits as a financialagency." If you buy gold overseas and pay a custo-dian a fee for safekeeping it, that custodian isprobably acting as a financial agency. On the otherhand, if you keep the gold in a safety deposit box ata bank or private vault facility to which only youhave access, the bank or vault probably isn't actingas financial agency. The final rules may clarifythese requirements.

pp. 220-23There are relatively few criminal prosecutions for failure tofile Form TD F 90-22.1. One likely reason is if there is nosignificant tax loss to the U.S. Treasury, a taxpayer whoneglects to file the form will generally be fined, rather thancriminally prosecuted. On the other hand, if there is a sig-nificant tax loss, prosecutors are more likely to bring taxevasion or tax fraud charges against the taxpayer. As a prac-tical matter, these cases are easier to prosecute than trying toprove a taxpayer "willfully" failed to file the reporting form.However, the IRS's expanding ability to penetrate bank se-crecy to obtain information in offshore jurisdictions suggeststhat criminal prosecutions of willful violators will increase.79

p. 223More than 20 offshore jurisdictions have enacted legislation

authorizing the creation of trusts with asset protection fea-tures.

pp. 223-225Offshore trusts also have compelling advantages to non-U.S.persons who are considering living, investing or doing busi-ness in the United States.80

p. 224The $25,000 sum mentioned in the last paragraph on thispage is expressed in Eastern Caribbean dollars. The equiva-lent amount in U.S. dollars is $9,250.

p. 228As U.S. courts continue to hammer away at offshore assetprotection arrangements, the "impossibility defense" may

become more difficult to justify if an anti-duress clauses ispresent in an offshore trust or other asset protection struc-ture. An alternative to a duress clause is a properly selectednon-U.S. protector with veto power over distributions.

p. 230In recent years, some promoters have marketed offshoreprivate interest foundations (OPIFs) to Americans as alterna-tives to offshore trusts. The use of OPIFs for asset protec-tion and estate planning purposes originated in Liechten-stein, although Panama is probably the most popular juris-dictions for OPIFs formed by Americans (Chapter 7). De-spite claims by some promoters that interest, dividends, andearnings of OPIFs are non-taxable, these entities generally

have no U.S. income tax advantages, unless set up for chari-table purposes. However, OPIFs can own tax-advantagedinvestments such as life insurance policies or annuities.

OPIFs are generally taxed the same way as OAPTs, but for-mation documents and bylaws must be carefully drafted toavoid the possibility that the entity will be taxed as a foreigncorporation, with potentially disastrous tax consequences.Because of the additional costs involved in drafting an OPIFthat is likely to withstand a possible "entity challenge" by theIRS, I don't generally recommend them, unless you havespecial needs better met by an OPIF than an OAPT.

p. 233

Untaxed gains in offshore variable annuities are likely a"non-eligible deferred compensation arrangement" for pur-poses of the expatriation rules that took effect June 17, 2008.This means that the annuity is deemed to have been distrib-uted one day before the expatriation date.

p. 234Offshore private annuities may be subject to the 1% excisetax described on this page. The safest strategy in this regardis to pay the tax, if it's not waived by treaty.

pp. 234-235In 2008, the IRS issued a non-binding "Chief Counsel Ad-vice" that signifies a significant expansion of the investor

control rules with respect to the segregated account of anoffshore variable annuity or offshore life insurance policy.The announcement implies that any investments held by aU.S. person in such a policy cannot be invested in assetsavailable to the general public and remain tax-deferred.

This reasoning contradicts prior IRS rulings, which have notbeen withdrawn. If upheld, the investment manager of aseparate account could not, for example, buy shares listed in


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a stock exchange anywhere in the world because these assetsare also available to the general public. Although the opin-ion isn't legally binding, it does foretell increased IRS scru-tiny of variable annuities and insurance policies.81

p. 235Income received from a private annuity, less the after-taxsum invested, is generally taxed as ordinary income, not as a

long-term capital gain or qualified dividend.

pp. 235-238To be cost-effective in both the acquisition of a PPVUL pol-icy and to reduce ongoing fees, the minimum practical pre-mium is around $2 million.

pp. 237-238Offshore life insurance and annuity contracts are reportableas "foreign accounts," beginning in 2010. The HIRE Actrequires that U.S. persons report the existence of any finan-cial instrument or contract held for investment from a for-eign issuer. This appears to target U.S. investors holding

non-U.S. life insurance or annuity contracts. Reporting ap-plies if the aggregate value of reportable offshore invest-ments exceeds $50,000.

p. 239If U.S. shareholders own more than 50% of the shares in aforeign corporation (e.g., an IBC), by vote or value, the for-eign corporation is classified as a CFC. A foreign corpora-tion in which a U.S. person owns exactly 50% is not a CFC.

p. 240You can decrease the likelihood that a creditor can seizeshares in an IBC by holding them in an offshore trust orother structure in which you have no authority to comply

with the terms of a judgment.p. 242In 2009, the IRS began to automatically assess a $10,000civil penalty on taxpayers who submit Form 5471 after thefiling deadline.82 Similar announcements are likely for othermandatory disclosures relating to foreign investments orbusiness relationships.

p. 242As with offshore LLCs, you can file Form 8832 to elect tohave a foreign corporation taxed as a disregarded entity or apartnership. This option is not available for numerous for-eign entities the IRS treats as "per se corporations" (e.g., thePanamanian S.A.).83

p. 243If five or fewer U.S. persons own 50% or more of the inter-est in an entity taxed as a foreign partnership, the partnershipis classified as a controlled foreign partnership. However,only those partners with a 10% or greater interest are in-cluded in the 50% or more control test.

pp. 244-245In recent years, it's become practical for smaller businessesto form captives by purchasing an interest called a "pro-tected cell" in an already-formed captive. So-called "rent-a-captive" arrangements make it practical for businesses withannual insurance costs exceeding $100,000 to benefit fromthe captive concept.

The IRS has issued rules that describe under what conditionssuch an arrangement constitutes "insurance" for federal taxpurposes. Basically, if your rent-a-captive insures the risksof multiple affiliated entities, premiums paid by the affiliatesare tax-deductible. But if it insures only the risks of itsowner, payments aren't tax-deductible. These rules providea road map to tax practitioners as to how to proceed withsmaller captive arrangements.84

pp. 245-246For 2010, the FEIE is $91,500. If you are married and bothyou and your spouse work overseas, you can exclude a com-bined total of $183,000 of earned income exempt from allU.S. income tax liability in 2010.

In most cases, the maximum housing exclusion is $11,656(2009 limit, adjusted for inflation). However, in certainhigh-cost foreign cities, the maximum housing exclusion ismuch higher. If you're married and both you and yourspouse are working offshore, only one spouse can excludehousing expenses, unless you maintain separate households.

The FEIE is limited to the actual foreign earned income mi-nus the foreign housing exclusion. Therefore, to exclude aforeign housing amount, you must first figure the foreignhousing exclusion before determining the amount for theforeign earned income exclusion.

Generally, if you live in a country that has a higher tax ratethan the United States the foreign tax credit that you canclaim will be more valuable than the FEIE.

To qualify for the FEIE under the bona-fide residence test,you must establish legal residence in another country for anuninterrupted period of at least one calendar year (January 1-December 31). You must also be either a U.S. citizen or aU.S. resident alien who is a citizen of a country that has anincome tax treaty in effect with the United States.

pp. 246-248The "exit tax" described in this section is now in effect, ef-fective June 17, 2008. The tax applies only to "covered ex-patriates." You're in this category if you have unrealizedcapital gains in your global estate that exceed $627,000(2010 exemption adjusted annually for inflation) and you:

Have a global net worth exceeding $2 million;and/or

Have an average annual net income tax liability forthe five preceding years ending before the date of


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the loss of U.S. citizenship or residence exceeding$145,000 (2010, adjusted annually for inflation);and/or

Fail to certify under penalty of perjury that youhave complied with all U.S. federal tax obligationsfor the five years preceding expatriation.

If both you and your spouse or partner expatriate, the $2

million exemption is effectively doubled.

If you're a covered expatriate, unrealized gains in non-grantor trusts and many kinds of retirement and pensionplans are exempted from the exit tax. Instead, they are sub-ject to a special tax regime. In most cases, there is a 30%withholding tax on future distributions. A second 30%withholding tax may also apply if you live in a low-taxcountry lacking a tax treaty with the United States. 85

Other types of retirement plans (including IRAs) terminateupon expatriation. Covered expatriates must pay income taxon the entire amount of tax-deferred income contributed to

such accounts, or earned within them, as if received in alump sum. Fortunately, no "early distribution" tax applies inthis situation if you're a covered expatriate under the age of59.86

The law also imposes a substitute estate tax on "coveredgifts or bequests" that exceed $13,000 annually received bya US citizen or resident from a covered expatriate, payableby the recipient.87 The $13,000 exclusion is adjusted annu-ally for inflation.

The best that can be said about the exit tax is that the newrules offer a relatively clean break with the U.S. tax system

as of the date of expatriation. Unlike prior law, there is nolonger a 10-year period after expatriation during which spe-cial punitive tax rules apply.

My report The Billionaire's Loophole contains a detailedsummary of this legislation. Link:http://www.nestmann.com/catalog/product_info.php?cPath=21&products_id=43.

p. 250

St. Kitts & Nevis passport holders can now travel without avisa, or obtain a visa upon entry, to more than 120 countries,including all 27 members of the European Union.

p. 250The Nestmann Group, Ltd. now works with a law firm thatwill process an application for Austrian citizenship for amuch lower fee than the amount listed on this page.

pp. 250-251The United Kingdom has now increased the tax burden onnon-domiciled residents ("non-doms"). Persons living orworking in the United Kingdom, but domiciled elsewhere,are now required to pay an annual 30,000 fee after seven

years of U.K. tax residence. This charge may be avoided bybecoming non-resident, or by electing to be taxed as a domi-ciled U.K. resident.88 Any offshore income or gains remittedto the United Kingdom are taxed in addition to the 30,000.Non-doms with offshore income and gains of 2,000 or lessare not subject to this tax burden.89

An alternative to the United Kingdom for non-domiciled

residence is Ireland. In the wake of the U.K. crackdown onnon-doms, the Irish Finance Ministry confirmed that it hadno plans to change its non-dom rules, which provide fiscaladvantages similar to those in the United Kingdom prior to2007.90

p. 256The United States also uses various forcible means to bringindividuals into the jurisdiction of its courts. U.S. authori-ties have used extradition treaties, deportations, and evenkidnapping for this purpose. Even citizens of countries thatrefuse to extradite nationals to the United States are vulner-able if they travel to a country that honors U.S. extraditionrequests.

pp. 257-259Efforts to force Americans to acknowledge previously un-disclosed offshore accounts continue. In 2008, a wealthyreal estate developer pleaded guilty to offshore tax evasionand agreed to cooperate in an investigation against Swissbanking giant UBS. The banker was eventually arrested and,like John Mathewson, turned over his client list to the IRS.He also revealed how UBS cultivated wealthy U.S. clients toopen accounts at UBS and assisted them in committing taxfraud.91

This information led the IRS to request a John Doe sum-

mons on UBS. A U.S. District Court subsequently author-ized the IRS to order UBS to produce the records of all ac-counts that it maintained between 20022007 for U.S. cus-tomers who had instructed the bank not to disclose theiridentities to the IRS. The IRS alleged there were approxi-mately 52,000 such account-holders.92

In 2009, UBS agreed to pay a $780 million fine and divulgethe names of approximately 300 account-holders to settle allcriminal and most civil charges. 93 The IRS then filed a mo-tion demanding enforcement of the John Doe summons forall 52,000 accounts alleged to have evaded U.S. tax. UBSsettled case by agreeing to a timetable for disclosure of ac-counts meeting certain criteria. Approximately 4,450 ac-count records are to be released.94

In 2010, The Swiss Federal Administrative Court declaredthe deal violated Swiss law.95 But after the Swiss Parliamentratified the U.S.-Switzerland information-sharing agreement,the court overrode its original decision, clearing the way forrelease of the bank records.96


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pp. 257-259In 2010, the IRS Criminal Investigation Division is openingoffices in 11 foreign countries, including Panama and Swit-zerland.97 This will make it much easier for a rogue bankerseeking an informant commission (or trying to avoid indict-ment) to turn over client data to the IRS. If this action vio-lates local law, the banker may get in trouble at home, butwill receive a generous commission courtesy of U.S. taxpay-

ers.

p. 258A second limited offshore amnesty ended Oct. 15, 2009.Nearly 15,000 taxpayers took advantage of the opportunityto avoid potential criminal prosecution relating to previouslyundeclared accounts.98 As with previous limited amnesties,a key condition for participation was to identify the specificindividuals and institutions that helped taxpayers evade U.S.taxes.

pp. 258-259In 2008, the IRS issued new rules to strengthen enforcementof the "qualified intermediary" (QI) program. When theserules become effective, foreign banks that invest in U.S.securities on behalf of their clients must conduct due dili-gence to determine whether U.S. investors, or legal entitiescontrolled by U.S. investors, are the beneficial owners ofaccounts the banks open.

Offshore banks acting as QIs must also be audited. And thegreatly expanded auditing requirements are perhaps the mostonerous provision of the new rules. For instance, if a foreignbank wants to use a foreign auditor, that auditor must have aU.S. accounting firm participate in the audit. The U.S. audi-tor must accept "joint and several liability" for the QI auditand cosign the report. If the foreign bank fails to identify

any U.S. clients, and those clients aren't discovered in theaudit, the IRS can bring civil or even criminal chargesagainst the U.S. auditor.99

pp. 258-259The HIRE Act imposes additional information disclosurerequirements not only on foreign financial institutions butalso on all foreign intermediaries, foreign investment vehi-cles and other foreign entities. Failure to comply will resultin a 30% withholding tax imposed in a similar manner as theQI tax. These requirements become effective on Jan. 1,2013.

Compliance obligations under the HIRE Act differ depend-ing on whether a foreign entity is a foreign financial institu-tion (FFI) or a non-financial foreign entity (NFFE). If a FFIdoesn't wish to cooperate with the IRS, it can avoid the 30%withholding tax only by closing all accounts owned by U.S.taxpayers. If the FFI wishes to continue servicing U.S. cus-tomers, it must either:

Enter into an information disclosure agreementwith the IRS. Like QI agreements, banks that sign

the information disclosure agreement are subject toexternal audits, or

Elect to enforce U.S. withholding requirements thatapply to domestic financial institutions. This wouldsubject all U.S. and foreign-source income (includ-ing gross sales proceeds) to IRS reporting.

U.S. payments to a NFFE aren't subject to the 30% with-

holding tax if a U.S. withholding agent receives a certifica-tion that the foreign entity does not have a substantial U.S.owner, or the name, address, and TIN of each substantial(10% or greater) U.S. owner.

Needless to say, a likely consequence of these initiatives willbe an even greater reluctance of offshore banks to deal withU.S. customers.

p. 260In 2008, the OECD published an update to its model taxtreaty.100

pp. 261-262

Declining tax collections in high-tax countries, combinedwith the sinking global economy, have renewed efforts toenforce sanctions against low-tax jurisdictions that allegedlyengage in "harmful tax competition." To avoid financialsanctions, dozens of low-tax jurisdictions have now signedtax information-sharing agreements (TIEAs) with OECmembers.

In 2009, the OECD issued a "grey list" of mostly low-taxcountries that have promised to boost cooperation in taxinvestigations, but have not yet done so.101 One of the mostimportant demands the OECD made to countries on this listis to ratify at least a dozen TIEAs. The OECD threatened

countries that failed to do so with placement on yet anotherOECD "black list." And that could result, according to theOECD, in potential isolation from the global financial sys-tem.102

To get off the grey list, the targeted countries enacted hun-dreds of TIEAs in the ensuing months.

pp. 262-263In addition to the forfeiture provisions of MLATs, theUnited States has entered into executive agreements on for-feiture cooperation, including: (1) an agreement with theUnited Kingdom providing for forfeiture assistance and assetsharing in narcotics cases; (2) a forfeiture cooperation and

asset sharing agreement with the Kingdom of the Nether-lands; and (3) a drug forfeiture agreement with Singapore.

The United States also has asset-sharing agreements withCanada, the Cayman Islands (which was extended to An-guilla, British Virgin Islands, Montserrat, and the Turks andCaicos Islands), Colombia, Ecuador, Jamaica, Mexico andthe United Kingdom. These agreements call for the United


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States to pay "kickbacks" to these respective governmentsfor the proceeds of qualifying forfeitures.

Pursuant to these asset-sharing agreements, and under otherprovisions of U.S. law, that United States has shared for-feited assets with Anguilla, Antigua and Barbuda, Argentina,the Bahamas, Barbados, British Virgin Islands, Canada,Cayman Islands, Colombia, Costa Rica, Dominican Repub-

lic, Ecuador, Egypt, Greece, Guatemala, Guernsey, HongKong (SAR), Hungary, Indonesia, Isle of Man, Israel, Jor-dan, Liechtenstein, Luxembourg, Netherlands Antilles, Para-guay, Peru, Romania, South Africa, Switzerland, Thailand,Turkey, the United Kingdom, and Venezuela.

From 1989 through 2009, the international asset-sharingprogram transferred nearly $230 million with foreign gov-ernments that cooperated and assisted in forfeiture investiga-tions.103

pp. 265-266The withholding tax imposed by the EU Savings Tax Direc-tive started at 15% in 2005, rose to 20% in 2008 and willincrease to 35% in 2011.104 In 2009, both the Isle of Man105and Belgium106 agreed to begin exchanging data with otherEU tax authorities rather than withholding taxes on income.

The European Commission has proposed amendments to thedirective would significantly tighten its provisions. Theseamendments will:

Increase the amount of data exchanged between EUmembers on accounts held outside a EU resident's homecountry

Increase the number of investments subject to informa-tion exchange or withholding, such as life insurance

Restrict the use of intermediaries to avoid tax by han-dling interest payments on behalf of EU residents

Treat tax evasion as a predicate offense to money laun-dering so as to tie in information exchange mechanismsto anti-money-laundering regulations to more easilyidentify the beneficial owner of accounts.107

pp. 268-269The ongoing international effort to isolate Iran from theglobal financial system hinges on a series of reports from theFATF accusing Iran of not being sufficiently diligent in ap-plying anti-money-laundering or anti-terrorist-financingrules. These deficiencies, in turn, have led the United States

to propose possible sanctions against Iranian banks. If thesesanctions come into place, under the USA PATRIOT Act,the U.S. Treasury could seize the U.S. assets of any Iranianbank, and any other bank doing business with Iran.108 (Alsosee updates to p. 94.)

pp. 272-274In 2008, the U.K. government used anti-terrorism legislationto freeze an estimated $6.5 billion of British assets belong-ing to Icelandic banks. It took this action not in response to

any terrorist threat, but to the failure of the Icelandic gov-ernment to guarantee repayments to British depositors infailing Icelandic banks doing business in the United King-dom. Given the unification of law documented in this sec-tion, this action by the U.K. government will no doubt behighly influential in other jurisdictions with an EnglishCommon Law background.109

pp. 272-274The crown dependencies of the Isle of Man and the ChannelIslands (Jersey, Guernsey, Alderney and Sark) have a uniqueconstitutional status. These island jurisdictions are geographi-cally close to Great Britain and are thus considered part of theBritish Isles. Each island has a minister appointed by thecrown, who is responsible for communicating matters of im-portance to the United Kingdom to each dependency. None ofthem, however, have ever been part of the United Kingdom.Indeed, they have a long tradition of self-governance; theTynwald, the parliament of the Isle of Man, is 1,000 years old,predating the English parliament by 300 years.

By the 1990s, the offshore industry had become a majorsource of income for the crown dependencies. Since non-resident investments were not taxed, and there was no ex-change of information with other countries in tax matters, theOECD, EU and U.K. tax authorities all demanded a crack-down.

In 2008, the U.K. government commissioned an "independ-ent review" of British Crown Dependencies and OverseasTerritories that function as offshore financial centers. Whenthe final report was published in 2009, the conclusions cameas little surprise. The report recommended that these islandjurisdictions deepen their commitment to OECD transpar-ency standards. It also observed that the OECD demands

had, in fact, led to significant financial hardships on some ofthe islands. As a result, they should "look afresh at optionsfor controlling public expenditure and increasing revenue."Among other initiatives, the report suggested that directtaxes might be considered. 110 It seems safe to conclude thatwhen the report's recommendations are fully implemented,both British overseas territories and Crown dependenciesoverseas territories will provide fewer opportunities for taxreduction, financial privacy, and asset protection.

pp. 272-274In 2009, after more than 600 years, the House of Lordsceased to be the highest court in English law. A SupremeCourt has replaced it, and the "Law Lords" who once servedon the Privy Council are now Supreme Court justices.111Henceforth, the Supreme Court will hear cases from thoseEnglish law jurisdictions whose constitutions preserve aright of appeal to the Privy Council.

p. 273The Caribbean Court of Justice is the court of final appealfor Barbados, Belize and Guyana. The Eastern CaribbeanSupreme Court is the court of final appeal for Antigua &


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Barbuda, the Commonwealth of Dominica, Grenada, SaintKitts & Nevis, Saint Lucia, Saint Vincent & the Grenadinesand three U.K. overseas territories (Anguilla, the BritishVirgin Islands, and Montserrat).

p. 273In the paragraph headlined "Bank Secrecy," delete the word"not" from the last sentence.

pp. 277-278

In 2007, Belize signed a debt restructuring agreement thatprovided significant liquidity relief for the government.Nevertheless, Belize's debt burden remains large, externalreserves are relatively low, and the fiscal position is vulner-able.112

pp. 277-278In 2009, the OECD placed Belize on its "gray list" of juris-dictions that had failed to abide by what the OECD calls "theinternationally agreed tax standard." Essentially, this meansthat Belize hasn't fully implemented the OECD's expandingstandard of information exchange outlined in Article 26 of

the OECD's model tax treaty (Chapter 6). Belize remains onthe gray list, as it has only four TIEAs in effect, althoughnone with the United States. It seems likely that interna-tional pressure will force Belize to sign additional TIEAs.

pp. 278-279Bermuda escaped the OECD's first harmful tax competitionblacklist in 2000. However, in 2009, the OECD placedBermuda on its gray list. Bermuda responded by enacting aseries of TIEAs (16 in all), plus one already in effect withthe United States.113 This was sufficient for Bermuda tograduate to the OECD "white list."114

pp. 278-279

In 2008, the head of Britain's Committee of Public Accountscalled Bermuda's record in combating money laundering"appalling." In 2007:

Authorities in the British Virgin Islands brought crimi-nal charges against IPOC International Growth Fund,Ltd., a Bermuda-registered mutual fund. The BVI ac-cused IPOC of laundering money for a powerful Rus-sian politician through the Bermuda Commercial Bank,one of Bermuda's largest and most respected banks.

The U.S. Securities and Exchange Commission broughtsecurities fraud charges against Lines Overseas Man-agement, headquartered in Bermuda. LOM stands ac-

cused of receiving at least $5.8 million from two stockmanipulation schemes.

A local Bermuda newspaper reported that the primeminister, while serving in another ministry, obtained$150,000 of publicly funded renovation on his home. Inconnection with an alleged press leak, police arrestedand detained the island's Auditor-General, whose re-sponsibility is to oversee the government's financial af-fairs.

The U.K. authorities have generally not interfered in Ber-muda's offshore sector, as they have historically consideredit as a well-regulated jurisdiction. For instance, while mostother U.K. overseas territories are subject to the EU SavingsTax Directive, it wasn't extended to Bermuda. A muchheavier regulatory hand now extends from the United King-dom to Bermuda. In addition, the United States has nowsigned a MLAT with Bermuda.115

However, there's little doubt that Bermuda's successful cap-tive insurance, investment fund, and trust management sec-tors will continue to thrive. Bermuda's financial infrastruc-ture is also well developed, including numerous internationallaw and accounting firms.

p. 280In 2009, the OECD placed the Caymans on its gray list. TheCayman government responded by enacting a series ofTIEAs (14 in all), including an earlier TIEA with the UnitedStates.116 This was sufficient for the OECD to place theCaymans on its tax white list.117

p. 281

In 2009, the OECD placed the Cook Islands on its tax graylist. The government responded by enacting a series ofTIEAs (13 in all), although no TIEA is in effect with theUnited States.118 The Cook Islands remain on the gray listalthough now that the government has ratified the requirednumber of TIEAs, it anticipates removal in the near future.

p. 281Corruption continues to plague the Cook Islands. In 2008, atrial involving former member of Parliament NormanGeorge and two others began. George and his co-defendantsare accused of accepting kickbacks and engaging in other

corrupt practices when buying heavy machinery on behalf ofgovernment.119 Prosecutors dropped half the charges againstGeorge in 2010, and he continues to serve as speaker of theHouse and a member of the Cook Islands Parliament.120

Economic challenges also continue, with the global financialcrisis leading to a downturn in tourism, the Cook Islands'largest source of foreign exchange. New Zealand and otherexternal donors continue to support the Cook Islands econ-omy.

pp. 281-282St. Kitts & Nevis, like many other small island jurisdictions,is heavily dependant on the tourist industry. As a result ofthe global financial crisis, tourist bookings declined sharplyin 2008 and the early months of 2009. At the same time,foreign investors continue to show confidence in the Federa-tion, with several luxury hotel/condominium projects near-ing completion.121

pp. 281-282When the OECD's 2009 anti-tax haven campaign began, St.Kitts & Nevis acted quickly to remove itself from the OECD


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gray list. It ratified a total of 16 TIEAs, although none is yetin effect with the United States.

pp. 281-282The long-term financial picture has changed fundamentallyfor the better with the discovery on Nevis of a huge capacityfor geothermal energy production. Funding is now in placefor construction of a 10-megawatt plant, sufficient to largely

meet the island's energy needs.122 Nevis' geothermal poten-tial may be large enough for it to become a net energy ex-porter.123 Revenues from the Federation's economic citizen-ship program (Chapter 5) also continue to increase. Tourismfrom European countries has grown following a mutualagreement that allows EU nationals to travel to St. Kitts &Nevis visa-free (and vice-versa).124

p. 284In 2009, Austria briefly appeared on the OECD gray list. Toqualify for removal from the list, Austria renegotiated 12 taxtreaties and TIEAs.125 Austria satisfied the OECD require-ments by renegotiating key tax treaties pursuant to the ex-panded information exchange provisions of Article 26(Chapter 6).

p. 284It is likely that Austria will eventually be forced to capitulateto the demands of other EU countries to exchange informa-tion automatically, rather than withhold tax.126

pp. 284-285Given the OECD's escalating campaign against bank se-crecy, the distinction between "tax evasion" and "tax fraud"in the U.S.-Austria MLAT isn't likely to remain in placemuch longer.

p. 285

While Austria has maintained its AAA rating from globalcredit rating agencies,127 several of its commercial bankshave received funds from a government bank rescue pack-age.128 The biggest financial challenge facing Austria, how-ever, is the nation's immense exposure to emerging markets,particularly in Eastern Europe. This exposure amounts toapproximately 85% of Austria's GDP. Some of Austria'smost over-extended commercial banks may face bankruptcyor nationalization.129

pp. 286-287In 2008, reports surfaced that the German government paidan employee of Liechtenstein's LGT Bank the equivalent of$6 million to provide confidential records about German

account holders. The stolen data is being used in tax evasionand tax fraud proceedings against hundreds of German tax-payers. Germany apparently shared data from these recordswith tax authorities in the United States, United Kingdom,Australia, and perhaps other countries.130

Liechtenstein sought to minimize the damage to its reputa-tion from this incident, but in 2008, the Principality signed alandmark Tax Information Exchange Agreement (TIEA)

with the United States that opens the door for the IRS toobtain information about bank accounts owned or controlledby U.S. taxpayers in Liechtenstein. Information is releasedon a case-by-case basis, and only after the IRS has demon-strated that possible tax evasion is at issue.131 This is despitethe fact that in Liechtenstein, tax evasion isn't a crime.

Liechtenstein eventually escaped the OECD tax haven

blacklist, but in 2009, it was placed on the OECD's gray list.Since Liechtenstein has only one tax treaty in effect (withAustria), its only option to exit the gray list was to enact atleast 12 TIEAs with expanded information disclosure re-quirements. The government quickly moved to do so, in-cluding a landmark TIEA with Germany.132

p. 288In 2009, Panama once again found itself in the OECD'scrosshairs. This time the OECD placed Panama on its graylist. The government sensibly decided to adhere to theOECD's demands, but rather than enacting a series ofTIEAs, it opted to negotiate full-fledged tax treaties.133 That

way, Panamanian businesses will benefit from reducedwithholding from income generated in the countries withwhich Panama has ratified tax treaties.

To date, Panama has only ratified one tax treaty (with Mex-ico), and it therefore remains on the OECD gray list. Trea-ties with Canada, Switzerland, the United Kingdom, andUnited States, are under negotiation. All these treaties willpermit foreign tax authorities to obtain information on finan-cial dealings of a named depositor, but they will not permittax-related "fishing expeditions."

pp. 289-290While Switzerland dodged the OECD's tax blacklist in 2000,

it wound up on the gray list in 2009. In response, the SwissFederal Council announced a fundamental change of thecountry's administrative assistance policy in international taxmatters. It agreed to exchange financial information in ac-cordance with Article 26 of the OECD model tax treaty.134This paved the way for Switzerland to enact or revise 12 taxtreaties and TIEAs and consequently, to exit the gray list.135Simultaneously, events culminating in U.S. legal actionagainst Switzerland's largest bank (UBS) forced Switzerlandto agree to release information with U.S. tax authorities onmore than 4,000 depositors of Swiss banking giant UBS.136pp. 289-290It appears inevitable that Switzerland will eventually bow to

EU pressure to the demands of other EU countries to ex-change information automatically, rather than withholdtax.137

NOTES

1 "A Look Into the Dark Underbelly of Data Breaches."NetworkWorld, May 30, 2008.2 "Trusted Traveler Programs." U.S. Department of Customs &


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Border Protection. Link:http://www.customs.gov/xp/cgov/travel/trusted_traveler.3 "A Bad Day for Big Brother."National Post (U.K.), May 7, 2007.4 "Seven Of Ten Murders Solved By CCTV."Daily Telegraph(U.K.), Jan. 1, 2009.5 "U.K. Government Says no Plans for FBI DNA Database Hookup."The Register, Jan. 17, 2008.6 "Bush Signs Bill To Take All Newborns' DNA."Infowars.net, May2, 2008.7 "Rules will Allow DNA Samples from Federal Detainees."Los

Angeles Times, Dec. 13, 2008.8 Maura Dolan and Jason Felch, "The Danger of DNA: It Isn't Per-fect." Los Angeles Times, Dec. 26, 2008.9 " Real ID Deadline Comes and Goes with Zero States on Board."

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