MONTHLY LETTER - December 2011 / January 2012

Could America look like this in 2013?

Southern European investors fearful of the health of their banks and the future of the euro are increasingly stashing their wealth in currencies, real estate and investment products outside the euro zone, say bankers and government officials.

In a troubling sign for European banks investors in Greece, Portugal and Italy are asking bankers and lawyers for ways to protect their money in the case of a failure of euro-zone banks or a breakup of the euro itself. Some are converting deposits into currencies such as the Swiss franc. Others are buying real estate outside the monetary union such as in London or setting up trusts to hold their wealth in jurisdictions as distant as Singapore or the Bahamas say bankers and lawyers.

Some Europeans move funds out.

While European leaders had hoped that the Dec. 9th  agreement on a stronger euro-zone fiscal pact would calm such jitters but instead tensions high, also when the euro hit its lowest level against the dollar since January. Moreover, in Italy's first auction since the pact the government had to pay a euro-era record yield of 6.47% to sell five-year paper, up from 6.29% a month ago.

As a result, the capital flight is likely to continue and could intensify, say experts. "Clients such as white collar professionals and business owners see a risk in the Italian banking system," says Andrea Cingoli, chief executive of Banca Esperia, a Milan private bank with €13.5 billion ($17.6 billion) under management. "As a result, they are looking at their options overseas."

With the exception of Greece the amounts still are relatively small, but the risk of a bigger exodus remains high. "Are we going to see significant outflows of money from these countries? Not yet," says Marcello Zanardo a London-based analyst with Sanford Bernstein. "But the line is very thin and the atmosphere is tense."

In Italy, the sharp escalation of fears over the country's fiscal woes and jitters over the liquidity crunch facing Italian banks have driven investors in recent weeks to Switzerland whose franc has soared this year as investors seek a refuge from the euro-zone crisis. In response, bankers in Switzerland's Italian-speaking region of Ticino report a small but steady inflow of Italian money over the past month, along with a sharp surge in inquiries from Italians fearful of a collapse of their banks or the common currency itself.

"We have seen a steady increase in the flow of money here by Italians looking for a stable political and financial environment like Switzerland, where the banks are moving away from the old bank secrecy model," says Christian De Prati, former CEO of Merrill Switzerland and currently an independent wealth manager.

Bankers say Italians are converting their Euros into Swiss francs and depositing them in Switzerland for safekeeping. Safe deposit boxes are virtually sold out while others are buying gold; Ticino gold retailer Pro Aurum has seen a surge in sales of gold bars over the past six months.

Some are considering more radical options. Paolo Gaeta, a Naples-based lawyer specializing in trusts, has been busy helping clients deposit their wealth in new trusts established in Singapore, the Bahamas and the island of Jersey in the English Channel. "We are being bombarded by clients," he says.

Andrea Caraceni, head of CFO Family Office, a Milan-based wealth manager with €800 million under management, is counseling clients to move money outside Europe altogether, including jurisdictions such as the U.S., Australia or Canada. And Roberto Lenzi, a Milan based lawyer specializing in wealth planning for investors with at least €5 million in assets has had requests in recent months from clients looking for help in moving their residences as well as their assets abroad.

Elsewhere, capital flight from Greece is intensifying. Since the start of Greece's debt crisis in late 2009, Greeks have pulled more than €60 billion of cash, about a quarter of total deposits from their banks. Between September and early November, those outflows totaled nearly €14 billion representing two of the worst months for deposit outflows since the start of the crisis.

According to the Bank of Greece about a fifth of deposits withdrawn in the first nine months of this year went abroad. One senior executive at a Greek bank said his group has seen a pick-up in transfers of money abroad over the past six weeks.

London real estate also is luring spooked euro-zone investors. Purchases of central London residential homes by Greek nationals have tripled in the last year at leading agent Knight Frank, according to Liam Bailey the firm's head of residential research, while Spaniards' acquisitions have doubled.

Since the start of Greece's debt crisis in late 2009 Greeks have pulled more than €60 billion of cash which is about a quarter of total deposits from their banks.

Southern European investors are also seeking investment products that minimize their euro-zone risk, but without sending money abroad. Demand for safe deposit boxes is up this year in Portugal, bankers say, as depositors seek alternatives to accounts, which can be frozen in case the country goes bankrupt or exits the euro.

Banks already fearful of a drain on deposits are obliging in other ways. Banks in Portugal, including Deutsche Bank AG's local offices there are offering clients equity funds registered in Luxembourg or depository accounts in currencies such as the Swiss franc, U.S. dollar or Japanese yen.

So wishing you the best in safety,

MONTHLY LETTER - October / November 2011

Federal Asset Seizures Rise Netting Innocent With Guilty

New York businessman James Lieto was an innocent bystander in a fraud investigation last year. Federal agents seized $392,000 of his cash anyway.

An armored-car firm hired by Mr. Lieto to carry money for his check-cashing company got ensnared in the FBI probe. Agents seized about $19 million—including Mr. Lieto's money—from vaults belonging to the armored-car firm's parent company.

He is one among thousands of Americans in recent decades who have had a jarring introduction to the federal system of asset seizure. Some 400 federal statutes—a near-doubling, by one count, since the 1990s - empower the government to take assets from convicted criminals as well as people never charged with a crime.

Last year, forfeiture programs confiscated homes, cars, boats and cash in more than 15,000 cases. The total take topped $2.5 billion, more than doubling in five years, Justice Department statistics show.

The expansion of forfeiture powers is part of a broader growth in recent decades of the federal justice system that has seen hundreds of new criminal laws passed. Some critics have dubbed the pattern as the overcriminalization of American life. The forfeiture system has opponents across the political spectrum, including representatives of groups such as the American Civil Liberties Union on the left and the Heritage Foundation on the right. They argue it represents a widening threat to innocent people.

"We are paying assistant U.S. attorneys to carry out the theft of property from often the most defenseless citizens," given that people sometimes have limited resources to fight a seizure after their assets are taken, says David Smith, a former Justice Department forfeiture official and now a forfeiture lawyer in Alexandria, Va.

Backers of the system say there are adequate protections for the innocent, and describe the laws as a powerful tool for returning money to crime victims.

The government has recovered for eventual distribution to victims more than $650 million from imprisoned swindler Bernard Madoff and others who received money from his scheme. Federal officials are in the process of recovering over $6.5 billion more from the Madoff fraud.

Last year, federal authorities say, some $293 million of forfeiture proceeds were returned to crime victims nationally, nearly double the amount in 2009. The Justice Department filed about 90,000 criminal cases last year. There were forfeiture actions in a total of about 3,700 criminal cases, double the number of 5 years earlier.

Supporters further say there should be many more forfeiture actions. Even an imprisoned criminal "can have a smile on his face because he is going to be able to enjoy the proceeds of his crime when he gets out," says Charles Intriago, a former federal prosecutor and now president of the International Association for Asset Recovery, a Miami organization for asset-recovery specialists.

Forfeiture law has its roots in the Colonial days, when it was used to battle pirates and smugglers. In the 1970s and 1980s, Congress began giving law-enforcement officials power to go after the assets of other criminals, such as organized-crime figures.

The more than 400 federal statutes allowing for forfeiture range from racketeering and drug-dealing to violations of the Northern Pacific Halibut Act, according to a December 2009 Congressional Research Service report. The report shows that seizure powers were extended to about 200 of those laws in 2000 in a major congressional overhaul of the forfeiture system.

Top federal officials are also pushing for greater use of civil-forfeiture proceedings, in which assets can be taken without criminal charges being filed against the owner. In a civil forfeiture, the asset itself—not the owner of the asset—is technically the defendant. In such a case, the government must show by a preponderance of evidence that the property was connected to illegal activity. In a criminal forfeiture, the government must first win a conviction against an individual, where the burden of proof is higher.

Raul Stio, a New Jersey businessman, is caught up in the civil-forfeiture world. Last October, the Internal Revenue Service, suspicious of Mr. Stio's bank deposits, seized more than $157,000 from his account. Mr. Stio hasn't been charged with a crime.

In a court filing in his pending civil case, the Justice Department alleges that Mr. Stio's deposits were structured to illegally avoid an anti-money-laundering rule that requires a cash transaction of more than $10,000 to be reported to federal authorities. Mr. Stio made 21 deposits over a 4-month period, each $10,000 or less, the filing said.

Steven L. Kessler, Mr. Stio's attorney, says there was no attempt to evade the law and that the deposits merely reflected the amount of cash his client's businesses, a security firm and bar, had produced. Mr. Stio was saving to buy a house, he says.

Speaking about civil forfeiture broadly, another Justice Department official called it a tool of "critical" importance in taking away the ill-gotten gains of international criminal organizations operating in the U.S. Otherwise, participants in criminal operations such as these might often be beyond federal authorities' reach, leaving asset seizure as one of the ways authorities can target an operation.

In fiscal year 2010, there were more than 11,000 noncriminal forfeiture cases, according to available federal statistics. That figure has held fairly steady the past 5 years.

It's tough to know how many innocent parties may be improperly pulled into the forfeiture system. Last year, claimants challenged more than 1,800 civil-forfeiture actions in federal court, Justice Department figures show.

Justice Department officials say they rarely lose such cases, a fact they cite as evidence the system is working properly. Forfeiture attorneys counter that the government often settles cases, returning at least part of the seized assets, if it thinks it might lose.

So wishing you the best in safety,

MONTHLY LETTER - August / September 2011

The Rise of the 'Sophisticated' Police-Dog Sniff

The battle over $38,480 seized from Bradford Nalou pitted the word of the Detroit-area businessman against the nose of Bruno, a Nebraska police dog.

In May 2009, the Nebraska State Patrol pulled over Mr. Nalou for speeding. A search of his car found the cash, which Mr. Nalou said was legitimately earned from his family-owned liquor store and money-transfer business. He was carrying it for a possible Las Vegas gambling trip, he said.

However, when Bruno was brought in to sniff the cash, the dog "alerted" to the taint of illegal drugs, federal authorities say. The police seized the money as being connected to a crime.

Seizures like these occur routinely on the nation's highways as part of the war on drugs, say forfeiture attorneys and law-enforcement officials. In many cases, such as Mr. Nalou's, an individual doesn't have to be charged with a crime to see his assets forfeited to the federal government, if officials can persuade a court that the asset itself is tied to illegal activity.

When suspicious cash is found, authorities often call in dogs that are trained to respond to the presence of illegal drugs. Federal statistics show there are well over 1,000 drug-related seizures per year, though it isn't known how many involve cash and dogs.

The reliability of "dog sniffs," long used in law-enforcement investigations, has been a topic of hot dispute. By the 1990s, courts were expressing doubts about the validity of searches that relied on dog-sniffs in the face of studies showing that up to 90% of all currency in circulation carried microscopic amounts of cocaine.

A 1996, a federal appellate-court decision called a dog alert on money "virtually meaningless," given the "extremely high percentage" of drug-tainted cash. A 1997 court decision said, "Even the government admits that no one can place much stock in the results of dog sniffs."

Scientific research came to the aid of law enforcement. Researchers concluded that dogs don't react to the cocaine itself, but to the odor of a chemical, methyl benzoate, given off by the drug. While cocaine traces might remain on a bill indefinitely, the methyl benzoate odor likely won't last more than a few weeks, said Janet Dooley, a trainer at Dogs Finding Drugs in Catonsville, Md.

The upshot: If a dog is properly trained to react just to methyl benzoate, "there is a high likelihood" that at least some of the money had recent contact with drugs, said Dr. Kenneth Furton, a professor of forensic chemistry at Florida International University and a prominent researcher in the field. While a dog's reaction still doesn't prove the money's owner was involved in drug trafficking, it "can be used as one piece of evidence," he said.

However, according to Dr. Furton, the dog should be trained to react to a relatively large presence of methyl benzoate, to protect against the possibility of a false alert to what is merely some incidental presence of drug residue. Dr. Furton says that there has been a school of training that uses relatively small amounts of cocaine to improve the dog's sensitivity—but he worries this could create more false alerts.

Dr. Furton says that in the late 1990s there was a wide variety in the quality of dog training. Since then there is been more of an effort by law enforcement to establish uniform standards for dog-training, a process some in the field refer to as the "sophisticated dog sniff."

A 2001 appellate-court decision upheld a $30,000 forfeiture based partly on a "sophisticated dog sniff" by a canine deemed properly trained to alert to methyl benzoate. A 2005 appeals court decision said that judges had "moved away from unquestioning acceptance of the currency contamination theory."

However, also in 2005, then Supreme Court Justice David Souter wrote that "the infallible dog…is a creature of legal fiction," adding that out of hundreds of drug-related searches a dog "will be wrong dozens of times."

After battling in court filings over the reliability of Bruno's sniff, Mr. Nalou and the Justice Department settled their dispute this month. Mr. Nalou got back more than 70% of his money; the rest was forfeited to the government.

So wishing you the best in safety,

MONTHLY LETTER - June / july 2011

News From The Cayman Broker!

Worried About The U.S. Dollar? Get Real Solutions!

An increasing number of clients worried about the drastic decline in the value of the US dollars, the health of the economy, the increasing debt and the possibility of hyper-inflation. The Cayman Island financial firm takes a global view on investing and can provide many solutions to hedge these growing concerns.

Here are just a few investment options available:

Physical Precious Metals: Gold is the traditional "Safe-Haven" asset. Governments & corporation are expanding their use of Gold as a reserve asset and reducing their reliance on the USD. In addition, many investors use Gold as a natural hedge against inflation or USD depreciation. Purchase precious metals, such as Gold, Silver, Platinum and Palladium, and get the actual bar numbers. You can take a margin loan of up to 80% against your other high yielding investments. You win twice.

Multi-Currency Cash Accounts: Clients can have cash accounts in up to 10 major currencies. Clients can also purchase foreign bonds to potentially boost returns.

Fixed-term deposits: Attractive interest rates are available for certificates of deposit in the following currencies: GBP, EUR, CAD, & USD.

Equity Inflation Fund: This fund aims to provide strong gains through investments in equities that have fixed pricing power and should benefit from rising prices. Fund denominated in several currencies. Annualized return: 47%

Emerging Currency & Fixed Income Fund: This fund aims to provide capital appreciation though investments in bonds, currencies & their derivatives in emerging Asian, Latin American, Eastern European, Middle Eastern, and African countries. Fund is available in several currencies. Annualized return: 19.7%

Natural Resource Fund: Natural resources are a great way to gain global exposure and diversify a portfolio. With the increase in global energy demand and high margins on oil & gold, this fund is positioned for strong future growth. The fund has historically produced very robust returns through investing in pre-IPO junior resource companies. Fund is available in several currencies. Annualized return: 156%

Get all of these options in one account. For more information on these investments please contact Bridgeway Financial Corporation at their Seattle office.

Joshua Vandyk,
Investment Advisor
BA, Series 3, 7, 30, & 63
Licensed

MONTHLY LETTER - April / May 2011

It was just announced that General Electric Corporation will pay NO taxes this year!

I thought that since we are in tax season and many of you own corporations like General Electric except a lot less income…how do they do it and can you?

Let's say your Nevada corporation earns a net profit of about $150,000 in your first year.

First off, you can write off up to $10,000 in start-up and organization expenses and let’s assume you only claim $7,000. That takes your income down to $143,000.

You can also write off all legitimate business expenses such as your computer, cell phone, iPad, your family car primarily used for business, your trip to Florida in February, and the hotel, while enjoying the sunshine on your “business” trip and you managed to write off another $10,000 a year in travel expenses so that brings us down to $133,000.

Next you will pay to the IRS Medicare and Social Security taxes for yourself the employee and the employer which will come to about $19,000 and you can deduct half of that, or $9,500, from your taxable income which brings your total down to $123,500.

As a corporation you have access to some terrific tax breaks on your investments and retirement accounts such as 401(k) plan which you can load $43,100 and write it off against your taxes. That money goes straight into a sheltered investment account, as with a regular 401(k).

Why $43,100?

That's because with a Solo 401(k), you're both the employer and the employee…as the employee you get to contribute a maximum of $16,500 as with any regular 401(k) and as the employer you also get to lavish yourself with an incredibly generous company match of up to 20% of net income. Being the boss has its privileges and if you're 50 years old or over your limit as an employee it’s raised from $16,500 each to $22,000.
You can also save another $10,000 by also contributing to your individual retirement accounts, $5,000 for you and $5,000 for your spouse reducing your taxable income and if you're 50 years or over, your limit rises to $6,000 apiece.

If you contribute $43,100 to your Solo 401(k), and $10,000 into two IRAs, that brings your income for tax purposes down to just over $70,000.

Next, write off your state and local taxes which we will estimate comes to $10,000 which approximates another $10,000 mortgage interest at 5% interest on a $200,000 home loan bringing our taxable income to $50,000.  
Let’s talk about health insurance. You can write off the premiums for yourself and your spouse and your kids.

If you use a qualifying high deductible health insurance plan there are a variety of rules to make sure the plan qualifies to give you another break. You can contribute $3,050 a year into a tax-sheltered “Health Savings Account” or $6,150 for a family and you can write those contributions off against your taxable income which these investments can grow sheltered tax-free. If it’s a qualified plan the withdrawals are tax-free. Let’s assume your payout is $10,000 for the premiums and $6,150 for the HSA contributions which now gets your income down to $34,000.

If you have outstanding student loans you can write off $2,500 in interest per year and you can write off $4,000 of your kid's college tuition and fees.

Then there's a personal exemption: $3,650 per person. If you're married with one child, that's $10,950.

With all of that your taxable income is just under $17,000 compared to our original income of $150,000…you owe less than $1,700 in federal income tax.

Now let’s look at tax credits which attack your tax liability dollar for dollar.

GE got write offs related to green energy but there are some for you but on a smaller scale. You can claim credits for things like installing solar panels, heat pumps and energy efficient windows in your home giving you a tax credit write off of $1,500 bringing down your taxes to $200.

Now let’s say spouse spends $1,000 on a qualifying adult education course which you can claim $200 or 20% of the cost in lifetime learning credits to a maximum is $2,000 thereby completely wiping out your remaining tax liability.

Congratulations! You've pulled a GE. You owe no federal income taxes at all.

You could have also written off a further $3,000 by selling any loss investments, a 401(k) deduction for your spouse as well.

What’s the end result?

You've paid no federal income tax while saving $19,000 toward your retirement through social security and Medicare and $53,000 through your 401(k) and IRAs. You've also paid for your accommodation which is the interest and property taxes on your home, covered your health care costs, written of a lot of expenses through your business account plus paid $4,000 toward your child's college costs and had about $2,000 left over.

Did I mention that your 401 (k) and self directed IRA accounts could open an IBC in the Cayman Islands which could possibly earn over 512% tax free in two years.

Did I forget to mention your Nevada Corporation’s corporately Defined Benefits Plan and Corporate Sharing Plan allows you a gigantic $1,200,000 million dollar tax write off while giving back to you a $600,000 tax free loan plus a whopping income of $420,000 per year or in other words a $35,000 annuity payable to you each month.

As CEO and President of your Nevada corporation… did I forget to mention your yearly tax free dividend, interest free company loan, section 179, corporate jet, limousine, company sports car, corporate resort, company motor home, boat, corporately owned vacation resort properties, company time shares, corporate 419 plan, 412(i) plan, VEBA plan and 501(c) 3 non-profit charities, and Family Endowment Foundations.

Bottom line…it pays to incorporate and the best place to incorporate is in tax-free Nevada!

So wishing you the best in safety,

MONTHLY LETTER - November / December 2010

MONTHLY LETTER - June / July 2010