It has been announced that based on a treaty request that will be submitted to the Swiss government UBS will turn over the names of almost all of the accounts the IRS requested last summer when it initiated the so-called John Doe summons.

The request will cover bank-only accounts, custody accounts in which investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.

Judicial enforcement of the John Doe summons will be terminated, however the government has retained the right to resume the action if the information it receives is substantially less than expected.

Account holders whose data ends up relayed to the IRS will receive notifications from the bank on a rolling basis in the next few months. However, those who received a notice will still be eligible to contact the IRS under the Voluntary Disclosure Program which offers to lower the penalty and, under certain circumstances, shield an individual from prosecution. They will have to do so by September 23, when the program is due to expire.

For those whose information it receives, the IRS will assess any additional tax, interest and the applicable penalties, including for willful failure to file a Report of Foreign Bank and Financial Accounts.

Although details have not yet been released, the Wall Street Journal has said it is expected the data will be handed over to the U.S. tax authorities and Washington will dismiss the case it filed in a U.S. court against UBS.

The bank has been at the center of the U.S. government’s efforts to uncover the names of American citizens who allegedly hid assets in its accounts in order to avoid paying taxes at home. Switzerland has long been a favorite banking destination of the wealthy due to its secretive banking laws.

This, however, may soon change.

In recent months, governments of several nations have been putting pressure on Swiss authorities to put more regulation and transparency in place, partially spurred by the crisis that rocked the foundations of global finance earlier this year and required many governments to run significant budget deficits to help their economies out of the recession.

In fact, the tide may be changing inside Switzerland itself. Media reports suggest the country’s Social Democratic party has filed a lawsuit with Zurich prosecutors against former UBS chairmen Marcel Ospel and Peter Kurer in connection with the bank’s management of American offshore funds.

"[The deal between the Justice Department and UBS] ultimately means nothing other than that UBS aided and abetted tax fraud," said party president Christian Levrat.

China is building itself the world’s largest war chest. Not in tanks, planes or even secret submarines. It has accumulated the largest collection of IOUs in history.

In an age where real politik is of greater import than Otto von Bismarck could ever have imagined, China is positioned to use the once almighty buck against the very nation that gave birth to it—the United States of America.

The U.S. has unprecedented debt and its largest creditor is China. But Beijing has aims on much bigger things than accruing depreciating dollars. Number one among its objectives is access to Middle East oil.

China Zeros in on Middle East

With real gross domestic product growing at a rate of 10 percent per year, China’s need for energy will surge by 150 percent by 2020. To sustain its growth China requires increasing amounts of oil. Its oil consumption grows by almost 8 percent a year, seven times faster than America’s! At the end of the next decade China will consume more oil than the United States.

There is only one place on earth that can meet China’s and America’s demand for oil and that is the Middle East. The region holds two-thirds of the world’s conventional oil reserves, and China is thirsting to control the world’s last remaining rich oil reservoirs.

Some 60 percent of China’s oil imports come from the shifting sands of Arab lands. By 2015 the share of Middle East oil sustaining China will reach 70 percent.

With Mexico’s elephant fields rapidly declining and Canada unable to make up the difference, the United States must also focus its attention on securing Arab oil.

“Where is the oil (of tomorrow) going to come from?” asked future Vice President Dick Cheney in 1999. “The Middle East, with two-thirds of the world’s oil and the lowest cost, is still where the prize ultimately lies."

If Cheney understood the importance of the Middle East a decade ago, we can be certain that Beijing understands it today.

There is no question that China and the U.S. are planning a future powered by Middle East oil. The real question is whether this last bastion of crude can meet the demands of both countries.

“Tensions over oil resources reflect the larger distrust between the sole superpower and the rapidly rising China.” wrote MSNBC a couple of years ago.

History Lesson about Ike and Real Power

If push comes to shove, China may hold the trump card. The reason is its unprecedented leverage over the United States.

The U.S. Treasury is auctioning off $200 billion—yes BILLION—in new debt every week.

“China has an estimated two-thirds of its more than $2 trillion in reserves in dollar assets, including more than $800 billion in Treasuries,” wrote The Wall Street Journal on July 29th.

In less than two years China will have its hands on $1 trillion in liquid U.S. IOUs.

That one country would leverage the debt it held of another for political and economic gain is not unprecedented. In the summer of 1956, England and France hatched a secret plot to re-capture the Suez Canal with force if Egyptian President Nasser nationalized the waterway.

After World War II the ruling elite in London saw the Suez Canal as the Anglo-Saxon expressway to its remaining colonies in North Africa and India. The canal was also taking on new importance.

“In 1948, the Suez Canal was gaining a new role—as the highway not of empire, but of oil…. By 1955, petroleum accounted for half of the canal’s traffic, and, in turn, two thirds of Europe’s oil passed through it,” wrote Daniel Yergin in his bestseller: The Prize: The Epic Quest for Oil, Money, and Power.

That meant the Suez Canal was a potential chokepoint and the most valuable waterway in the world. Not a property to be trusted to Arab hands thought some members in the House of Lords. Key among them: British Prime Minister Anthony Eden.

So when Egypt nationalized the Suez Canal, France and England were putting together a response. In October 1956, British and French forces attacked Egypt. Soon after, British paratroopers hoisted the Union Jack over the Suez Canal.

Eden knew that the U.S. opposed the operation. But he also knew that President Eisenhower would never send American forces into combat against its two closest NATO allies.

The Sun Sets on the British Empire

It turned out Ike didn’t have to. The Eisenhower administration forced a cease-fire on Britain and France without firing a shot. It did it with money.

At the time the U.S. was the world’s largest creditor and one of its biggest borrowers was Great Britain. The U.S. had sustained England through the war and was using the Marshal Plan to help rebuild the nation.

Ike told Secretary of the Treasury George Humphrey to prepare to liquidate U.S. government holdings of British bonds. London was made aware of Ike’s plan.

The Chancellor of the Exchequer Harold Macmillan told Eden that he believed Eisenhower would sell England down the river if British troops did not withdraw immediately. He had an even more pressing message from Macmillan—if London resisted and the Treasury sold its Sterling bonds—England would be bankrupt within a month! The island nation would face a winter without food or oil.

The next day Eden announced a cease fire and evacuated England’s troops from Egypt. He did it without even consulting the French.

For centuries England had been indomitable. Yet, with a phone call, Ike had done what the Spanish Armada, Napoleon’s army and Hitler’s Luftwaffe had all failed to do. He had brought the British Empire to its knees.

England was humiliated. Britain would never again been seen as a world power and its currency, the Pound Sterling, began a freefall which lasted for decades.

As the above chart shows, in 1956 it took almost $3 to buy a British pound. But a long decline in the value of the pound that had started in World War II began in earnest. By the 1970s London no longer had the financial wherewithal to peg the pound to the dollar. By 1985 the pound was trading at par with the buck!

Bond Market Peril

Britain’s and the pound’s decline occurred as America rose to super-power status. Today America finds itself where England was half a century ago—defending its interests, but facing an economic giant in China, a country that does not have the military to dominant but does have the money to dictate their vision.

Last spring the U.S. Treasury market was close to panic when China hinted it might want to diversify out of U.S. government debt. And as an investor you should understand that China doesn’t even have to sell its huge holdings of U.S. Treasuries for the bond market to go into a tailspin.

All it simply has to do is sit out a few Treasury auctions. If that were to happen, market forces would drive up U.S. interest rates. All of which makes today’s political and economic environments very risky for bond holders and potentially lucrative for real asset investors.

The suit was filed in U.S. District Court in Southern Florida and claims a married couple hid customers’ assets through transactions involving fraudulent foreign trusts, sham foreign corporations and bogus trustees. This created an illusion the businesses were based overseas, when in fact they continued to be owned and operated in the U.S.

It also says the defendants falsely told customers that these transactions made their income and assets exempt from U.S. income tax.

Between 2000 and 2005, the suit further alleges, approximately $28 million was channeled through the scheme, and the U.S. Treasury losses are estimated at $4.3 million.

"The Justice Department and Internal Revenue Service are working vigorously to stop tax fraud schemes and detect those who use them," says John A. DiCicco, acting assistant attorney general for the Justice Department’s Tax Division.

Since President Obama took office, the authorities have intensified their efforts to restrain the practice of offshore asset protection.

They gained additional momentum after politicians gathered at the G20 summit in London in April vowed to crack down on tax havens by introducing cross-border regulation.

I’ve been thinking about what Rousseau said because I have passed an anniversary of sorts. Thirty-years ago this past spring I was trying desperately to keep my grades up as a junior at the University of Calgary.

One afternoon the sun was beating into our classroom. It was a petroleum-economics class taught by a Frenchman, Dr. Mitra. But that day was unusual because the professor was agitated. This was most strange. The only agitation I had ever seen in that class came from the students who regularly received Cs and Ds from the white smocked, pipe carrying Dr. Mitra.

As the bell rang, Mitra exclaimed: “This thing in Iran… this Khomeini; it changes everything!”

I don’t remember what I thought of this. I was young and selfish, so I probably wondered if it would affect the final I was already cramming for. It turned out that Dr. Mitra was talking about a lot more than a final exam for one of his classes.

It was the late 1970s, the stock market was in crisis, there was a young inexperienced Democrat sitting in the Oval Office and, oh yes, a pop star that some called “The King”, had died prematurely—of a drug overdose in his home, they said.

Sound familiar?

Back to the Future
Years later I think Dr. Mitra was saying the revolution in Iran would permanently change the markets. That nothing in international oil would be as it was before; that the removal of the Shah and a new clerical regime with its Supreme Leader would transform the Middle East.

He was right.

In 1979 the Iranian Revolution sent oil prices soaring. The country’s oil production plummeted drastically to 2.5 million barrels a day. The 1980 Iraqi invasion worsened the situation. In fact, combined production of both countries fell to just 1 million barrels per day compared to 6.5 million barrels in 1978! This lowered the global production by 10 percent, and oil prices rocketed to $36 per barrel.

Today Iran is on the brink of another revolt. America is getting ready to pull out of Iraq, a move that could throw that country into chaos. With violence escalating in both nations—countries that produce 12 million barrels of oil per day, an amount almost equal to what America imports—the ordinances are set for another price explosion.

In fact, there is a growing potential for a new terror to boil-over in the Middle East… a nuclear kind of terror.

Just how close Iran is to having operational nuclear weapons is unclear. But one thing is certain; Israel is taking the threat seriously. Last month former Israeli defence minister Shaul Mofaz told Israeli radio that Iran is a ballistic power close to becoming a nuclear power.

“Iran has undoubtedly passed beyond the point of no return, moving closer to the ultimate nuclear capacity everyday," said Mofaz.

We are talking nuclear missiles in a region that holds two-thirds of the world’s conventional petroleum reserves. It’s enough to give American strategic planners nightmares. It also sets up the biggest potential for oil and gas profits ever. A scenario that I believe will push crude oil past $150 per barrel and natural gas above $8 per 1,000 cubic feet.

Then, on July 10th, Israel issued a direct warning to Iran. It spelled out the catastrophic consequences if it attacks the Jewish state with weapons of mass destruction.

In an interview published last Friday in the Hebrew daily Ha’aretz, Israel’s national security advisor Uzi Arad said Israel must have "tremendously powerful" weapons to deter or retaliate for a nuclear strike.

In other words, touch us and we will wipe you off the map.

To read more of Israel’s sword-first diplomacy, go to: http://www.voanews.com/english/2009-07-10-voa10.cfm.

In 2009 Iran’s Crisis is an Even Bigger Threat

My office sits 20 minutes from Calgary’s core and I try to get downtown as often as I can. Last week I was at the Canadian Unconventional Oil Forum held at one of the city’s fancier hotels. It’s not so much what you hear from the speakers as what you hear at the bar—coffee, juice or otherwise.

I ran into an old university buddy during a break. He heads up a mid-sized oil and gas company that has more than 100 million barrels of proven reserves.

“If there’s trouble with Iran, it’s going to be a real mess,” he said. “Look at Bush and that Iraqi thing. That was about oil. And if this thing in Iran gets out of hand, the U.S. will be in there too. They’ve got no choice.”

I asked him if I could quote him.

“Sure,” he said as he walked back towards the lecture theatre, “just don’t use my name.”

The fact is America’s fortunes are tied to Iran and the Middle East. Consider this:

• The United States accounts for less than 4 percent of the world’s oil production but consumes more than 30 percent of world oil supplies.
• The average oil well in the continental United States pumps less than 300 barrels per day. The average well in Iran produces 10,000 barrels per day.
• The last elephant oil field (more than a billion barrels) discovered in the United States was in Prudhoe Bay, Alaska in 1968.

In fact, 2009 marks a milestone for the United States. For the first time since World War II, we pumped less than 5 million barrels of oil per day. We pumped almost twice as much oil 30 years ago during the first Iranian crisis.

As Thomas Wolfe said, we can’t go home again

Meanwhile, Iran remains an oil kingpin. It is the de facto leader of OPEC, has the second largest conventional oil reserves in the world and is the world’s fourth largest producer of crude.

Yet in the end maybe Rousseau was wrong, at least in this instance. Things haven’t so much stayed the same, they have gotten worse. And that is bad news for America which lately has only shown talent for one thing—pumping money.

It is however good news for petroleum investors. The first Iranian revolution doubled the price of crude oil. Today, with America so much more dependent on the Middle East and with the stakes so high, the upcoming price spike could be huge, perhaps putting oil above $150 per barrel. Any way you look at it, that’s an A+ for energy investors.

Yours for real wealth,

—John Myers

Earlier this year, the U.S. Internal Revenue Service has filed a lawsuit against the bank in an effort to force it to disclose the identities of thousands of American citizens it suspects of hiding assets in Switzerland and tax evasion.

The bank has already provided the names of about 250 clients and paid the U.S. $780 million in fines related to offshore tax havens, according to FoxBusiness.com.

Now, the three parties had asked a federal court in Miami to postpone a hearing scheduled for July 13 so they can continue settlement talks.

The Justice Department has said any deal "would necessarily include a provision requiring UBS to provide the Internal Revenue Service information on a significant number of individuals with UBS accounts."

The U.S. government’s crackdown on what it sees as tax havens was prompted by the financial crisis and the costly stimulus bill as well as several rounds of bailouts that need to be paid for.

It gathered steam after the G20 summit in London in April where global leaders pledged cooperation in pursuing the matter.

However, Swiss Finance Minister Hans-Rudolf Merz said his government’s support for the agreement will ultimately depend on how the stalemate over Switzerland’s largest bank UBS is resolved.

The U.S. Internal Revenue Service is pursuing a civil lawsuit against UBS seeking access to data on 52,000 wealthy Americans it claims are hiding nearly $15 billion of assets in Swiss bank accounts.

Meanwhile, the Swiss minister and his German counterpart have reportedly agreed on a revision of their double taxation agreement ahead of a summit of Organization for Economic Cooperation and Development finance ministers today.

The developments stem from the consensus reached earlier this year during the the G20 summit in London. Blaming offshore tax havens as contributing to the current financial crisis, the leaders of the world’s most industrialized nations vowed to crack down on tax evasion by introducing cross-border regulation.

The OECD has estimated that $1.7 trillion to $11.5 trillion dollars are being held in tax havens around the world.

An agreement with the U.S. is considered crucial to Switzerland’s removal from the list of tax havens.

Following the example of the federal government, many U.S. states have recently adopted voluntary disclosure programs for taxpayers with undeclared offshore accounts.

However, the benefits of a state tax amnesty can be even more advantageous than the current IRS policy, say lawyers from Caplin & Drysdale, a company specializing in tax and legal services to companies and individuals.

They add some state programs can include full penalty abatement, immunity from state criminal prosecution and a limit on the number of years of tax returns that need to be amended.

However, "To qualify for most of the state voluntary disclosure programs, the taxpayer must make an application directly to the state taxing authority [so] simply filing amended state tax returns is not sufficient," says Jim Mastracchio, a partner with the firm.

The U.S. government’s crackdown on what it sees as tax havens was prompted by the financial crisis and the costly stimulus bill as well as several rounds of corporate bailouts that need to be paid for.

It gathered steam after the G20 summit in London earlier this year where global leaders pledged cooperation in pursuing the matter.

A statement issued by the White House says the current tax code offers a competitive advantage to companies that invest and create jobs overseas and provides opportunities to avoid taxes through offshore tax havens.

To prove that, it cites statistics indicating that almost one-third of all foreign profits reported by U.S. corporations in 2003 came from just three countries, namely Bermuda, the Netherlands and Ireland, known for their low tax levels.

To remedy the situation, Obama has proposed replacing tax advantages for investing overseas with incentives to do so at home by reforming deferral rules that give tax breaks to those who reinvest overseas.
He has also vowed to continue to "get tough" on overseas tax havens.

"It is the downpayment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations," the president said at a joint news conference with Treasury Secretary Timothy Geithner.

The White House estimates the plan will save around $200 billion over the next decade and will discourage companies from enhancing their foreign operations at the expense of creating American jobs.