A controversial court case you haven't heard about... and why it should matter to you

From Nick Giambruno for Casey Research:

A court ruling involving Microsoft’s offshore data storage offers an instructive lesson on the long reach of the U.S. government—and what you can do to mitigate this political risk.

A federal judge recently agreed with the U.S. government that Microsoft must turn over its customer data that it holds offshore if requested in a search warrant. Microsoft had refused because the digital content being requested physically was located on servers in Ireland.

Microsoft said in a statement that “a U.S. prosecutor cannot obtain a U.S. warrant to search someone’s home located in another country, just as another country’s prosecutor cannot obtain a court order in her home country to conduct a search in the United States.”

The judge disagreed. She ruled that it’s a matter of where the control of that data is being exercised, not of where the data is physically located.

This ruling is not at all surprising. It’s long been crystal clear that the U.S. will aggressively claim jurisdiction if the situation in question has even the slightest, vaguest, or most indirect connection. Worse yet, as we’ve seen with the extraterritorial FATCA law, the U.S. is not afraid to impose its own laws on foreign countries.

One of the favorite pretexts for a U.S. connection is the use of the U.S. dollar. The U.S. government claims that just using the U.S. dollar—which nearly every bank in the world does—gives it jurisdiction, even if there were no other connections to the U.S. It’s quite obviously a flimsy pretext, but it works.

Recently the U.S. government fined (i.e., extorted) over $8 billion from BNP Paribas for doing business with countries it doesn’t like. The transactions were totally legal under EU and French law, but illegal under U.S. law. The U.S. successfully claimed jurisdiction because the transactions were denominated in U.S. dollars—there was no other U.S. connection.

This is not typical of how most governments conduct themselves. Not because they don’t want to, but because they couldn’t get away with it. The U.S., on the other hand—as the world’s sole financial and military superpower (for now at least)—can get away with it.

This of course translates into a uniquely acute amount of political risk for anyone who might fall under U.S. jurisdiction somehow, especially American citizens. A prudent person will look to mitigate this risk through international diversification.

So let’s see what kinds of lessons this recent court ruling offers for those formulating their diversification strategies.

The Biggest Lesson

The most important lesson of the Microsoft case is that any connection to the US government —no matter how small—exposes you to big risks.

If there’s anything connected to the U.S., you can count on the U.S. government using that vulnerability as a pressure point. Microsoft, being a U.S. company with a huge U.S. presence, is of course exposed to having its arms easily twisted by the U.S. government—regardless if the data it stores is physically offshore.

Now let’s assume the company in question was a non-U.S. company, with no U.S. presence whatsoever (not incorporated in the U.S., no employees in the U.S., no servers or computer infrastructure in the U.S., no bank accounts in the U.S.): then the U.S. government would have a much more difficult time accessing the data and putting pressure on the company to comply with its demands.

It’s important to remember that even if a company or person is more immune to traditional pressures, there are plenty of unconventional ways the U.S. can respond.

The U.S. government could always resort to hacking, blackmail, or other acts of subterfuge to access foreign data that is seemingly out of its reach. This is where encryption comes in. We know from the Edward Snowden revelations that when properly executed, encryption works. For all practical purposes as things are today, strong and proper encryption places data beyond the reach of any government or anyone without the encryption keys.

Of course, there is no such thing as 100% protection, and there never will be. But using encryption in combination with a company that—unlike Microsoft—is 100% offshore is the best protection you can currently get for your digital assets.

Once you get the hang of it, encryption is actually easy to use. Be sure to check out the Easy Email Encryption guide; it’s free and located in the Guides and Resources section of the IM site.

How easily the U.S. can access your offshore digital data will also come down to the politics and relationship between the U.S. and the country in question. You can count on the UK, Canada, Australia, and others to easily roll over for anything the U.S. wants. On the other hand, you can bet that a country with frosty relations with the U.S.—like China or Russia—will toss most U.S. requests in the garbage. This political arbitrage is what international diversification is all about.

The lessons of the Microsoft case extend to offshore banking.

It’s much better to do your offshore banking with a bank that has no branch in the U.S. For example, if you open an HSBC account in Hong Kong, the U.S. government can simply pressure HSBC’s large presence in the U.S. to get at your Hong Kong account—much like how the U.S. government pressured Microsoft’s U.S. presence to get at its data physically stored in Ireland.

Obtaining the Most Diversification Benefits

Most of us know about the benefits of holding uncorrelated assets in an investment portfolio to reduce overall risk. In a similar fashion, you can reduce your political risk—the risk that comes from governments. You do this by spreading various aspects of your life—banking, citizenship, residency, business, digital presence, and tax domicile—across politically uncorrelated countries to obtain the most diversification benefits. The optimal outcome is to totally eliminate your dependence on any one country.

This means you’ll want to diversify into countries that won’t necessarily roll over easily for other countries. This is of course just one consideration, and it needs to be balanced with other factors. For example, Russia isn’t going to be easily pressured by the U.S. government. But that doesn’t mean it’s a good idea to bank there.

Personally, I’m a fan of jurisdictions that are friendly with China—which helps insulate them from US pressure—but have a degree of independence and are competently run, like Hong Kong and Singapore.

Naturally, things can change quickly. New options emerge, while others disappear. This is why it’s so important to have the most up-to-date and accurate information possible. That’s where International Man comes in. Be sure to check out our Going Global publication, where we discuss the latest and best international diversification strategies in great, actionable detail.

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