Today's comment is by Bob Bauman, JD, Former U.S. Congressman and both Senior Writer and Legal Counsel for The Sovereign Society. 

In the last year we've seen...

* German tax spies break the law when they paid a former Liechtenstein bank employee millions to steal foreigners' bank records with accounts there.

* A disgraced UBS American banker tried to save his own hide by blabbing in a U.S. District Court about how he and other UBS officers allegedly helped wealthy Americans to evade billions in taxes.

* Reports that UBS is considering divulging the names of up to 20,000 of its well-heeled American clients.

* The New York Times screaming about: "A hole in the wall of secrecy surrounding the world of Swiss banking, a step that would have once been unthinkable to Swiss bankers, whose traditions of secrecy date to the Middle Ages."

"What is this world coming to?" you may rightfully ask.

Nothing But the Cold Hard Facts

Before I get into this, let's get a few basic facts straight right now.

First of all, like it or not, the U.S. Internal Revenue Code requires all "U.S. persons," (meaning citizens and resident aliens, i.e. green card holders), to pay annual income taxes (IRS Form 1040) and any other taxes they may owe.

This applies no matter where you live in the world, where you received any of your income, or where your income is deposited, either in the U.S. or offshore.

Secondly, it's LEGAL for U.S. persons to invest, bank, do business, or live offshore in some other country. The reason people question its legality is because the IRS launches full blown marketing campaigns every year or so to discourage savvy individuals from taking their wealth offshore. In truth, the IRS would rather your money was right here at home - where anyone from their agents to identity thieves can keep an eye on your wealth (all the more reason to go offshore in my opinion).

So if you do decide to use your constitutionally guaranteed freedom to invest or do business offshore, the U.S. law requires that:

• You annually inform the IRS (on Form 1040) that you have an offshore account over which you have direct or indirect control
• As a "U.S. person" (which includes corporations, trusts and other entities), you must disclose your status each year by June 30. You also must describe any foreign financial accounts that you (or your entity) has a beneficial interest or direct or indirect signature authority over all your foreign financial accounts that exceed US$10,000
• The report requires you as the filer to provide your name, address, date of birth and taxpayer identification number, the name of the foreign financial institution, the country where your account is located, the type of account and the account number for each account (This is the infamous U.S. Treasury FBAR Form, TD F 90-22.1 - Report of Foreign Bank and Financial Accounts.)

Finally, from our founding over 10 years ago, we at The Sovereign Society have advocated full compliance with applicable tax and financial reporting laws. We remind our readers that U.S. law requires all U.S. persons to pay income taxes on all worldwide income (see above) and that willful noncompliance may result in criminal prosecution.

As Usual, the U.S. Government Is Making Extraordinary Demands

Now that we have that disclaimer out of the way, let's get to the rotten meat of the current UBS banking scandal.

No, I am not referring to the crass stupidity of the UBS managers that has cost the bank and its stock owners tens of billions in lost dollars. If you're interested in my comment on that, click here.

What I'm talking about was inspired by an email from a Sovereign Society member. In his email, he said he was beginning to doubt that you could find financial privacy offshore. Specifically he was concerned about the recent indictment and testimony of an ex-UBS banker, a disgruntled American named Bradley Birkenfeld.

After reading the UBS story anyone could have doubts about offshore financial privacy. Those are exactly the doubts the IRS wants to foster among gullible Americans. (By the way, The Sovereign Society has been warning against using UBS for a decade because of their anti-privacy policies.)

Apparently the Feds believe some American UBS clients may have used offshore accounts to hide as much as US$20 billion in assets from the IRS. Doing so may have enabled these people to dodge a possible US$300 million in federal taxes on income from those assets, according to a nameless government official.

As noted above, using offshore bank and other accounts is not illegal for U.S. taxpayers, but hiding income in so-called "undeclared accounts" is. Right now, they're investigating whether the UBS clients filed tax forms with the IRS and disclosed securities and assets held offshore in accordance with U.S. law. Switzerland does not consider tax evasion a crime, and using undeclared accounts is legal there.

The Swiss government and private banking sector reportedly sent a delegation to Washington to meet with U.S. Justice Department (DOJ) officials last week. The trip follows a request by the Justice Department to the Swiss government for assistance in investigating UBS.

Among other things, the U.S. DOJ wants to force UBS to turn over the names of up to 20,000 American offshore clients who may have violated United States tax laws.

Been Here, Done That IRS

Note: This extraordinary demand means the U.S. government is taking the preposterous position that any U.S. person with a UBS account is automatically considered a potential tax evader.

This is an alarming replay of the same high handed position the IRS took in 2002. At the time, the IRS made a phony issue of Americans using credit cards issued by offshore banks. Using half truths and distortions, the IRS smeared the presumed guilt of tax evasion on all offshore credit card holders.

While the IRS conceded offshore based credit cards were legal, the IRS insisted some people "might" use offshore accounts and the cards to hide unreported income.

On that 2002 paper thin presumption, the IRS forced a nervous American Express and MasterCard to turn over all the records of 230,000 U.S. persons with offshore credit cards issued by banks in The Bahamas, the Cayman Islands, and Antigua. 

The IRS also got a U.S. court to order VISA to turn over the records of hundreds of thousands of U.S. persons with credit cards issued in any IRS-designated "tax haven" nations from Luxembourg to Singapore. (The court had jurisdiction because the major credit card companies had collection operations within the United States.)

At first the IRS claimed that US$70 billion a year was being lost by credit card evasion. Later they said they had identified 82,100 taxpayers who they said used offshore accounts to evade taxes, with an estimated annual tax loss at US$447 million. When it was all over a few years later a deflated IRS admitted they only caught about 1,500 tax evaders who had to repay a few million in back taxes.

For this paltry return, information on hundreds of thousands of Americans with offshore credit cards had been turned over to the IRS to fuel this scare campaign.

Sound familiar IRS? You're doing the exact same thing now - and I'm guessing you'll have the same paltry returns for your efforts.

A Very Reasonable Solution to Some Very Unreasonable Demands

The manufactured ruckus over the apostate UBS bankers indictment, is just one more skirmish in the continuing war against wealth, financial and personal privacy, and, ultimately, against everyone's liberty and freedom.

If these guys can bring a bank the size of UBS to its knees, imagine what they'll do when the knock comes on your door. Plan accordingly and prepare to do battle.

Of course there is a simple way for you to avoid all these tax troubles - simply file the proper reports and pay your taxes when they're due.

Also, understand what you're getting by taking your wealth offshore. Today securing "financial privacy" doesn't mean hiding your wealth from the U.S. tax system or the government. That simply doesn't work. As evidenced by these ridiculous tax witch hunts recently, those ravenous IRS agents will find you.

No, financial privacy means keeping your wealth private from anyone else who might want to take it. That includes any nosy business partners, identity thieves, irresponsible relatives, and anyone who may ever want to sue you in the future. And yes, by doing so, your wealth is much safer than here in the United States.

That's it: Pay your taxes, and keep your wealth safe and private from everyone - particularly these mass IRS smear campaigns. And rest easy: Unless the IRS plans to send armed military units to Switzerland and Liechtenstein, I doubt that these sovereign nations are going to surrender any time soon.

BOB BAUMAN, Legal Counsel

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In the End, the Fed's Bark Proves Worse Than Its Bite

Will they or won't they? That was the hotly-debated question as everyone waited anxiously for the Federal Reserve to wrap-up a two-day policy meeting yesterday.

But as we predicted, when the news hit the wires - the Fed held the line keeping rates unchanged - while its war-of-words against inflation continues.

But even with yesterday's decision, there's still no doubt that inflation worries are leading to lots of lost sleep these days for global central bankers. In fact, the European Central Bank may actually raise rates at its upcoming July meeting.

The trouble is higher interest rates don't do much to combat this kind of inflation, which involves mainly soaring food and fuel costs.

Headline inflation in food and energy prices has so far not spilled over into rising wages, the biggest input cost for most businesses. In fact the opposite is true. In developed markets like the U.S. and Europe real (inflation adjusted) wage growth is declining, thanks to the globalized economy making labor markets more flexible.

In fact, employment in the U.S. is already on the decline. Consumer and business confidence in both the U.S. and Europe has fallen to the lowest levels in years, if not decades.

But still, the Fed must continue to "talk tough" on inflation, if for no other reason than to keep the dollar from free-falling. The U.S. dollar is down about 40% this decade alone against a basket of world currencies. This simple fact has as much to do with rising oil and other commodity prices as global supply-demand imbalances.

Talk is cheap, but I expect the Fed to stick with a war-of-words against inflation - rather than shifting gears on monetary policy. The latest housing data show foreclosures up over 40% last month with bank repos of abandoned homes nearly doubling.

With continued pressure on housing, consumer confidence at record lows, and employment falling, the Fed is not likely to begin raising interest rates anytime soon, as clearly demonstrated in yesterday's non-event. Stay tuned for "tough talk" on inflation. The Fed's bark is worse than its bite.

MIKE BURNICK, Senior Editor and Global Market Analyst

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Put a Fork in These Bonds - They're Done

The world's best performing fixed-income index since 1992 is now stuck in a rut. And as stagflation concerns continue to mount in the emerging markets, returns are likely to turn negative for the first time since 1998.

The J.P. Morgan Emerging Markets Bond Index has outpaced the returns generated by all other debt markets over the last 15 years. Emerging market debt has also outpaced the S&P 500 Index since 1993 and many other industrialized economy stock markets.

Over the last several years, emerging market countries have benefited from shrinking credit spreads, or interest rate differentials between emerging market bonds and risk-free Treasury bonds. The largest emerging markets, like Russia and Brazil, benefit enormously from rising commodities prices. Others, including China and India, have also gotten a boost from the export boom driven by low wages.

But with growing inflation concerns, especially in Asia, investors are starting to redeem all their funds that are tied to emerging markets.

According to Emerging Portfolio Fund Research, the appetite for global bond funds continues to fall off a cliff. For the week ending June 20, emerging market bond funds suffered from growing jitters about rising inflation in Turkey, Russia, China, and Argentina.

In Asia, consumer prices are now in excess of 7.5% - their highest rate in 9 ½ years. Also, many emerging market economies are now overheating as central banks combat rising inflation with rate hikes. Rising interest rates, combined with growing inflation, depresses bond prices.

Despite the increasing redemptions in 2008 from individual investors, credit spreads remain historically low. The benchmark J.P. Morgan Emerging Markets Bond Index is yielding just 2.88% more than 10-year Treasury bonds. Over the last 12 months, emerging market debt has gained 5.9% compared to 12.6% for 10-year T-bonds. But this year, the asset class is down 1.6% as inflation and rising rates knock prices lower.

With the exception of high-grade corporate debt in the United States and in Europe, you should avoid the majority of fixed-income markets in a growing environment of toxic inflation in food and energy prices. Many emerging market central banks will be forced to raise rates even higher this year. That will be bad news for stocks and bonds.

For now at least, it looks like the big post-2002 bull market for emerging market assets is finally over. It won't resume until governments lick inflation.

ERIC ROSEMAN, Investment Director

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