Back in August, the exchange rate was just about 18 Pesos for US$1.  The Central Bank at the time attempted to intervene in the currency markets to prevent the Peso from passing the 19 Pesos for US$1 level, but as they say, you cannot fight the free market.  In any event, after spending an estimated US$50 Million in foreign cash reserves, the Central Bank has now decided they will stop meddling and allow the currency exchange markets to float where they may. 

The Peso has historically devalued by about 5 percent annually vs. the US Dollar, and why we have always advised clients to carefully consider the exchange risks that are always present when you invest in another currency (and why we caution clients to consider keeping the bulk of their assets in US Dollar based investments, with perhaps only a certain percent in local currency investments as outlined as a strategy in our previous newsletters).  Many clients have taken the view that if they are earning 20% or more in Peso denominated deposits, that even after factoring in a possible 5 percent devaluation, they are still earning 15 percent in US Dollar terms (of course higher than the 8 percent or 9 percent offered by many of the banks for US Dollar Bank Certificates of Deposit).  However, it is always difficult to predict currency exchange markets, unless you are an insider, and even then things do not always go the way you might expect.

In any event, while the Peso has reached 23.5 Pesos to the Dollar in early December, the Peso has strengthened against the dollar and current exchange rates are about 20.5 to 21 at the moment.  Why the spike up to 23?  Basically this was local speculation as the private business community began hoarding US Dollars, causing an artificial shortage in the market of foreign currency.  The real or true rate, in our analysis (Andres Marranzini and myself), is between 20 and 21 Pesos.

However, there is a silver lining, which is that Dominican Real Estate has just gone ON SALE for foreign investors.  Since the real estate market always moves much slower than the capital markets (and much slower than the business community, which can more quickly change prices for imported goods), the same house that being sold for RD$2 Million Pesos back in August - September for the equivalent of US$112,000 can now be purchased for the equivalent of US$ 95,000.  Keep in mind that most new middle class homes being constructed in the capital are being marketed at 1.2 Million or 1.5 Million Pesos, so a home for 2 Million Pesos will be a very, very nice home accordingly (with perhaps a Jacuzzi in the master bath, more upscale kitchen cabinets and so on).  Does this mean that if the Peso devalues further, that a real estate investment is a risk?  Not at all - as real estate always keeps pace with inflation because it is a hard asset.  However, as we said, real estate prices do not always move in exact tandem with the capital markets, but eventually they do move.  So, the opportunity does exist for foreign investors to pick up some real bargains at the moment (when paying in the their own currency, such as US Dollars or Euros, and converting to Pesos at the current rates).  When would be the best time to do this?  In our opinion - January or February 2003 would be the time to go real estate shopping in the near term.  Why?  The current strengthening of the Peso is a direct result of traditional influx of US Dollars into the local economy from Dominicans living and working abroad.  It is estimated that US$ 1 Billion Dollars comes into the country each December and historically the Peso strengthens against the Dollar as a result, going back to older levels in January - February.  So, look for the Peso to trade around 20.50 to 21 Pesos to the Dollar through Christmas Time, with a weakening to take place after that - if that in fact even happens as the currency may just in fact stabilize at 21. 

Along the lines of REAL ESTATE, many clients have contacted us for referrals to a local English-speaking real estate agent or have asked for our direct assistance.  In this regard, we have finally put together a program for clients, whereby clients may keep funds in ESCROW for any real estate purchases and utilize our legal staff for title search, title transfer, etc.

In addition to this, we have also finally found an honest Dominican fellow who is our man about town, so to speak, in terms of finding the bargain properties for our clients.  In the past, some clients have found that many of the local real estate agents only showed them the higher priced properties marketed to foreigners, which were NOT the bargains we have often spoken about.  In truth, this happens all over the Caribbean, but it makes it even more difficult when you do not speak the local language. 

However, our man in the capital district - Ray Daniels, will gladly turn over rocks, jump over fences, go out to chat with the farmers, and generally speaking, get into the thick of things - researching the kinds of properties our clients are asking for.  Ray has spent most of his adult life living in and working in New York as a Social Worker (Ray has said working with our clients in terms of DR real estate beats being a social worker in New York City any day of the week, and the people are a lot nicer too) and had decided to quit the rat race to come home (like many other Dominicans over the past three years who have escaped the high US income and property taxes, layoffs, poor economy and other negative issues affecting the US at the moment).  In fact, Ray is on the job even now, putting together a list of properties for you to review, which we will place on-line very shortly.  These properties will include 10 acre farms just outside the capital we spoke about previously for US$20,000 or less and NEW homes inside the capital for less than US$100,000.  Stay posted as we develop this for information for you.  However, if you want to contact Ray immediately, you can reach him at 809-844-3688.    

The Guardian Group announces a new addition to its customer service staff, the very lovely Aaimee (pronounced Amy) who speaks English and will be available to answer any questions.  The direct office telephone is: 809-221-0090, email for customer service: custserv@theguardiangroup.com.  The current interest rate for the Guardian US Dollar Cash Reserves Series (money market fund) is 10%.

Jeff Donner answers some investment related questions from clients below.  We will try to expand our newsletter going forward with investment or real estate questions answered by Jeff, Ray and perhaps some others in the future.  To contact Jeff directly, send an email to: jkndonner@msn.com

Answer:  Yes, the IRS will be notified if the stocks have dividends, and in such a case this has to be reported as earnings.  However, if you invest with many of the NASDAQ stocks, such as Intel or Microsoft, or any other stocks that do not spin off dividends, then no IRS reporting is required.  In other words, stay away from any investment that pays out a dividend, as the real benefit for a foreign owned brokerage account (domiciled in the US) is with CAPITAL GAINS.

Due to the Patriot Act, in part as one reason, and or external pressures from the other government agencies in general, many US brokerage firms will be very difficult to work with regarding such offshore owned or titled accounts.  Our firm does have some experience in working with clients that have (or are planning to) expatriated, so we have developed a number of strategies accordingly.  Keep in mind if you have an offshore structure such as a foundation or corporation or are Non-U.S. resident, then the tax consequences may be still be zero in terms of your investments, but proper planning is the key.

Answer:  Yes, except you will have to reallocate the money by selling your U.S. holdings and repurchasing new in the off shore account. Your U.S. annuities should be sold at the end of the year, especially if there is a loss in value because this loss goes against any earnings that you are taxed on, a unique tax minimization strategy. The mutual funds and life insurance products should be analyzed for inadequacies vs. newer more efficient products available.  It is quite possible to often own the very same mutual funds you currently have, albeit offshore, with some of the annuity products that are in existence today.  This still seems to be one loophole left, although it is a question of changing how ownership is titled, as US citizens are prohibited from owning these products (even thought they might be offered by the same US insurance or mutual fund companies, if you can believe it).  So, perhaps it is the case of owning such investments through a Trust or Foundation, or perhaps as a citizen of another country (through a second citizenship).

MIAMI, Florida (CNN) -- A federal grand jury has indicted six Miami airport workers on charges of stealing items from the checked luggage of British Airways passengers, federal officials announced Wednesday.

Despite an initial outpouring of public sympathy for America following the September 11, 2001 terrorist attacks, discontent with the United States has grown around the world over the past two years. Images of the U.S. have been tarnished in all types of nations: among longtime NATO allies, in developing countries, in Eastern Europe and, most dramatically, in Muslim societies.

While attitudes toward the United States are most negative in the Middle East/Conflict Area, ironically, criticisms of U.S. policies and ideals such as American-style democracy and business practices are also highly prevalent among the publics of traditional allies. In fact, critical assessments of the U.S. in countries such as Canada, Germany and France are much more widespread than in the developing nations of Africa and Asia.

With anti-American sentiment on the rise, international markets have become perilous for U.S.-based multinationals. But that's just business as usual for But that's just business as usual for McDonalds.  During the last decade, the Illinois-based chain has been the target of political protests in more than 50 countries. Alas, preventing Ronald McDonald from taking bullets intended for Uncle Sam often means using marketing tricks that would never play in Peoria.

The United States is not supposed, in its own self-image, to be an empire. (Nor is it supposed, in its own self-image, to have a class system-but there you go again.) It began life as a rebel colony and was in fact the first colony to depose British rule. When founders like Alexander Hamilton spoke of a coming American "empire," they arguably employed the word in a classical and metaphorical sense, speaking of the future dominion over the rest of the continent.

John:  The December 10 Sovereign Society newsletter has an article on Caribbean countries signing a Tax Information Exchange Agreement with the U.S. IRS.  The article indicates that the Dominican Republic was one of the countries agreeing to TRANSPARENCY. 

In the past year, four more Caribbean nations have made their banking systems more transparent to the U.S. Internal Revenue Service in return for favorable tax status for U.S. meetings. Antigua & Barbuda, The Bahamas, The Cayman Islands, and The British Virgin Islands join ten other Caribbean-area destinations where a U.S. company can take the same tax deductions as they would for a U.S.-based meeting, no questions asked.  Generally, business meetings held outside the North America are not a tax-deductible expense unless they pass an "as reasonable" test. A U.S. company must show that it is as reasonable for the meeting or convention to be held outside the U.S. as inside. However, meetings in countries that have signed the Tax Information Exchange Agreement (TIEA) with the United States are not held to that standard. The agreement allows the IRS to view private banking records in cases of tax evasion and money laundering.  The other Caribbean-area countries that have signed the TIEA include Barbados, Bermuda, Dominican Republic, Grenada, Guyana, Jamaica, St. Lucia, Trinidad & Tobago, Venezuela.

EDITORS COMMENTS:  Well, I have to be careful how I answer this as many clients tell me I say too much as it is.  I will say that smaller nations have two choices politically.  Denounce the US as an arrogant tax hungry SOB publicly and privately, or Yes them to death and keep moving along as before.  I cannot answer about the other nations, but can only say that the bankers and private businessmen in the Dominican Republic are not stupid.  After all, let us look at the hard facts.  The Bahamas did what the US wanted and their economy went into the toilet as a result.  It is estimated that 40% of the banking deposits flew out of the Bahamas within the first six months of the government signing such an agreement, and now supposedly the Bahamian Government is back peddling - admitting they made a mistake.

What government in their right mind would be so stupid to honestly believe that ALL US corporations are going to rush down to the Caribbean to hold board meetings.  Heck, the vast majority of American Companies are laying people off and business travel has been cut back by over 60%, according to some estimates (just ask the airline industry).  So, is it the case that the foreign government leaders are completely stupid or are they clever like a fox?  In other words, telling the nice folks from the IRS:  Oh, Yes - That sounds wonderful.  Where do we sign?  In turn, knowing it is better politically (speaking in terms of International Politics) to go along publicly, allowing them to keep on keeping on - so to speak - privately?  Using a recent example from the issues in the Middle East, we have a country such as Yemen buying missiles from North Korea, after telling the US that they never made such a purchase.  Of course, the US let them keep their missiles because, after all, they are good guys - they signed the international agreement to fight the war on terrorism.  International politics is full of smoke and mirrors.  The US government, in my opinion, is honestly the naïve group of individuals (either truly believing what they offer, or thinking that everyone else believes it).  Thinking that by signing a piece of paper, that this in and of itself means Pandora's box will magically open up, and that things will change.  Do you think other nations and other political leaders do not honestly question the integrity of a nation, such as the US, that allows an Arab country to buy weapons form a so-called axis of evil nation (North Korea, who now recently announced full steam ahead with their nuclear programs)?  How about a nation (US) that publicly supports the current leadership in Haiti, which has been linked to drug trafficking, arms trafficking and money laundering?  Do you think other political leaders elsewhere do not see this hypocrisy?

Getting back to the topic at hand, bank account interest in the Dominican Republic is not reported because it is tax-free.  This being the case, the banks do not even have the computer systems in place or capability to start reporting anything, and that is not what is taking place either or being asked (what is being asked, in theory, is that they allow Mr. Poindexter McGillicutty from the IRS to show up with his slide rule and have access).  Secondly, it is estimated that about 40% of the local banking deposits in the DR are foreign owned.  Foreigners put their money into Dominican Banks (in US Dollars, and now Euros) because interest is tax-free and higher than elsewhere.  It's that simple.  If anything happens to change either one of these benefits, they will see the same fate as the Bahamas and this is what the US wants.  However, not everyone is completely blind or stupid for that matter in this regard.  Draw you own conclusions.

This aside, all of this goes back to the issue and need for a second citizenship.  In theory, if the IRS is supposedly snooping around, the underlying premise is that they are snooping in terms of US citizens (for US tax related issues).  Do you know what the real answer is?  Gain a second citizenship and do not do your banking or investing as an American, as your long-term goal.  For a number of reasons, now more than ever, dual citizenship is a vital part of anyone's long-term financial (and often physical) survival.

Dear Sir:  I just came back from visiting Puerto Plata.  I used local transportation, mingled with the locals and found the whole experience to be very positive.  I spoke to local bankers to find that the interest rates are very high on CDs.  I would like to invest for the high rates, but I am not up on how stable the economy and currency is. Can you shed some light on how strong the currency is and how stable the economy and government is? I like the high return but if the currency goes from 20 to one us dollar to 40 to one us dollar the 20% CD rate goes out the window. Can you help me?

EDITORS REPLY:  Well, as mentioned earlier, unless you are living in the Dominican Republic, or plan on visiting quite often, it is probably a better bet to keep your funds in US dollars, in order to avoid any possible currency exchange pitfalls.  When you think about it, getting 8% or 9% locally tax-free on US Dollar deposits is not bad, in comparison to current US rates, so I do not see it as a negative to keep your funds in dollars. 

In terms of politics, the country has had a democratically elected government for the last 40 years, so I do not see any instability.  It is true however, that many foreigners view social protest as being a signal of some sort trouble, which is not the case.  It is simply Latin Culture.  Which is to say, I think in most Latin Countries, there is a distrust of government or certainly a distrust when one political party does things whereby general population is not in agreement.  Case in point, Guatemala, whereby the residents in one town local burnt down the house of the mayor because it was perceived he supported the rise in sales taxes.  Again, Latinos know they if they do not demonstrate their sentiments, they will not be taken seriously. Dominicans are generally speaking, good people, but they, like citizens in many other Latin countries, will not tolerate any nonsense (and often demonstrate so in a way that might be misperceived abroad). 

On the economic front, the Dominican Republic has posted positive economic GDP over the last ten years, even while other countries were experiencing negative growth (they call it recession).  In addition, the economy is more diversified than it was in the past, with the banking and telecommunications sector growing faster than tourism or anything else, so I think they will be on the right track if such a trend continues (diversification).

Greetings.  I have been looking into reforestation and exotic fruit plantation investments in Panama, and have been in contact with San Cristobal Development Company.  After much research, I contacted the realty companies myself, with the idea of planting myself - and was given not-so-good news about the integrity of some in this arena. I was forwarded your Panama Update article.  I already have a trip planned to Panama (this Wednesday!) to both meet with the San Cristobal Land Development people, and to research on my own. My question is-is it still feasible to live in Panama and make some income through agriculture or reforestation? Is it risky? What are my best options? I feel like the original information I received about Teak and Noni investment may not be accurate.  Please advise. Thank you so much.

EDITORS REPLY:  I do not want to endorse or degrade any specific company or project, but I will say some of the deals seem to be somewhat ridiculous to me.  In other words, you can probably find yourself a nice piece of farmland in Panama for about US$25,000.  If you hire a guy or even a family to live on the property and take care of it, at worst case, perhaps you might be paying them US500 per month (and that is a high estimate by local standards in Panama).  So compare that to paying US$100,000 or more for some of these deals advertised (for 20 acres or whatever they claim).  Agriculture is always risky and I would not count on becoming a millionaire off of teak trees or Noni plants (heck - Noni grows wild in the Dominican Republic, you pick the fruit from the side of the road in some places).   Teak wood does carry a premium over other kinds of hardwoods, but also consider the time you must wait to cut the trees as well.  On the positive side, a tree farm does not require much care, but these return estimates being touted are bit optimistic and are based on a number of unknown variables (such as the price for teak when it comes time to cut).  In my estimate, if you want to farm in Panama, grow cocoa.  Acre for acre, cocoa is still one of the highest yielding crops (cash flow wise) than anything else, even more so than coffee.  For quicker cash flow, plant lettuce.  Yes, I said good old boring lettuce.  It grows fast and you are constantly harvesting, so you constantly have something to sell.  How does a city boy like me know?  Experience - my wife owns a small farm in the Dominican Republic.  When I am not writing or attending to clients, my wife has me carrying rocks out at the farm (which is why I try to work in the office as much as possible).  Roger Gallo says it's good therapy and builds character (I think I am enough of a character as it is).  Maybe.  Hmmm, that gives me an idea.  Noni seems to be a fad right now, but what about pet rocks - Dominican Pet Rocks that speak Spanish?  Nah - better off staying with the lettuce, it weighs less and is easier to carry.

Here is an article that scares the, you know what, out of me. George Orwell would be proud of this.   I look forward to filling out the paperwork and becoming a client in 1Q 2003 and eventually getting Dominican citizenship so I can discard my passport from the United Socialist States of Amerika. (The funding won't be available to me until then.)  I hope that the Dominicanos do not pry into the affairs of its citizens like the United Socialist States of Amerika does.

EDITORS REPLY:  Thank you for the article and I think you need not worry about the Dominicans.  They have lived under a dictatorship just 50 years ago and many people still remember.

John:  You're doing a marvelous job! I'm sick of these tax idiots in the U.S. (I'm a US citizen) & want out. Besides the great motivation I found in your article on a web-based business, I'm hot on the idea of setting up an offshore software development center.  Can you assist? I've been taking a virtual peek at Belize, Panama & other havens. My critical need is to find a pool of local IT talent. Belize seems out on that count. Panama looks hopeful, but all my emails to the authorities have gone unanswered. Can you help me out on this?

EDITORS REPLY:  Well, this relates back to the comments I mentioned before, which is that it is not a case that one place is better than the other, but rather which country has what you are looking for.  I would agree with you on Belize.  Panama of course does have a much more developed Internet infrastructure and that means more of a case of finding people versed in computer related issues.  The Dominican Republic has not yet quite caught up with Panama, but they are working on it.  All in all, however, I would say if you are looking for IT professionals to do software development, look in India (which is what most of the Silicon Valley companies have had to do in the past).  You may want to consider setting up your business in India, or trying to get some top quality people from India to relocate to the DR.   

John:  Lawrence Esparance (?) had a recent column stating that investors should avoid any business with companies that have ties with banks having QJ & QI (Qualified Intermediary institution with the U.S.A) associations with the I.R.S.   He also said that an institution that has correspondent banking relationships with a US bank should be avoided.  As you can see from my below correspondence with a company mentioned below, they seem to have the latter.   Is this something I should worry about or does this relationship somehow differ from Lawrence's statement.  Does the bank you deal with concerning your Guardian investments fall under either of the above two statements?

EDITORS REPLY:  I have not seen the article, but I can offer the following.  Every single bank outside of the US that either offers US Dollar accounts, has the facility to accept US Dollar wire transfers or offers to accept and clear US Dollar checks will have some kind of correspondent relationship with a US bank.  So, to look for a non-US bank offering services in US Dollars that does not have some kind of correspondent relationship in place is like trying to find a three legged chicken.  There are a number of reasons for this, but the short answer is that it has to do with the mechanics of how US Dollar funds are moved and the check clearance process.  I do not know Lawrence Esperance, but I would say he needs to brush up on his understanding of how banking actually works, both inside of the US and abroad, if what he actually wrote is as you explained.

However, the real question is how this might affect you as an account holder of such a foreign bank (in terms of a US Dollar account).  In short, any time a wire transfer of US Dollars takes place, the money never leaves the US - it just gets re-titled as a bookkeeping entry.  That is actually what happens when you complete such a transfer or even present a check for clearance.  If you think that your bank physically sends cash with a messenger to another bank, you are dead wrong.  Almost all such payment systems or money movement systems are electronic book keeping entries.  This is how commerce and business gets done.  It is naïve and foolish for anyone to suggest you look for a foreign bank that is not tied into this process.  Although I have said or suggested that you AVOID US banks with branch offices or that own banking organizations outside the US (for example Citibank in Panama or elsewhere, etc.).  Why?  Well, what basically happens is that foreign banks that have a US banking license or have non US affiliates are pressured to give up the names of US citizens that might have accounts with them in their offshore jurisdiction offices.  The threat of course that they will loose the US banking license if they do not comply.  So, for this reason, it is always better to bank with an entity that does not have a US banking license, but that is a very different matter than a bank with a US correspondent account.  After all, the US correspondent account is what is known as an Omnibus account, whereby it is one account in the offshore bank's name and there is no possibility to ascertain whom the underlying clients of the bank might be.  If could of course be the case that the US puts pressure on the foreign bank to disclose their client list, threatening to close the correspondent account, but who cares?  The foreign bank simply closes the correspondent account with one bank and opens another the next day with another bank.  If the foreign bank really wants to make it confusing, they can open a correspondent account with another non-US bank, in turn using the US correspondent account of the other non-US bank.  Sound complicated and confusing?  Imagine the trouble the IRS has with it.

In any event, just understand the difference between a foreign bank that has a US correspondent bank account (titled under the foreign bank's name), and a foreign bank that is owned by a US bank.  Two very different issues and circumstances.

In terms of the Guardian Fund, I can only say that the PRIVACY of our clients is paramount.  However, there are also a number of strategies that can be suggested if a client wishes to complete a bank wire transfer and does not want them selves disclosed as part of such a transaction.  For very obvious reasons, I am not going to discuss them here.