Fast, Cheap and Out of Control - Internet/Web/Online Service Information

Industry Standard, The, August 14, 2000 by Stewart Taggart

As long as there have been borders, people have crossed them in search of the most advantageous legal environment. It's called regulatory arbitrage, and the Net is now making it easier than ever.

Care to bank from a Pacific Island, store your online data in Scandinavia and pay taxes in Barbados? A nicer mix of financial secrecy, data privacy and low government levies would be hard to imagine.

If this multijurisdictional legerdemain appeals to you, lames Bennett could be your man. He's in the business of providing, as he calls them, "sovereignty services." For a fee, he'll slice and dice your business or personal affairs to put them in the best mix of global jurisdictions to keep the authorities off your back.

"Anguilla has nice privacy laws and low taxes, but they've had some scams over there," Bennett says. "Meanwhile, Scandinavian countries aren't financial tax havens, but they do have very strong data privacy laws and good courts. It depends on what you're after."

Bennett, who has been mixed up in everything from commercial rocketry as president of American Rocket Company to nanotech research as director of the Foresight Institute, founded Internet Transactions Transnational in 1997. He expects his Virginia-based company to be up and running by the end of this year. Initially the company will focus on arranging the affairs of wealthy individuals, but Bennett plans to branch out later into business services, using virtual private networks, proprietary authentication and arbitration methods and a system of global access points.

"The nice thing about the Internet is that it allows you to link -- cheaply -- a number of jurisdictions with different characteristics," he says. "We just aim to lower the threshold cost."

Like others, Bennett is an entrepreneur looking to make an Internet buck off of one of our oldest activities: regulatory arbitrage.

Simply put, regulatory arbitrage involves exploiting differing rules in different jurisdictions - for a profit. Think back to when you were a kid. If Mom wouldn't give you a dollar, you asked Dad for one. If they both said no, you asked your aunts and uncles when they visited. The system works in childhood so we use it throughout our lives.

Salesmen seek out the easy marks among buyers in an organization, physicists look for paths of least resistance in experiments and lawyers readily engage in jurisdiction shopping for sympathetic courts. Shipping companies operate under flags of convenience, Switzerland and Liechtenstein profit from discrete domestic banking secrecy laws and multinationals adroitly shift manufacturing to places where safety laws are lenient.

Now entrepreneurial dot-coms are trying their hand at the game. To an arbitrageur, regulations are a price that businesses, consumers of jurisdictional services, pay. Just as the Internet has brutally exposed global product-pricing inefficiencies, the Net's now being used to assault the leather-bound world of national regulations. The enabler here is the near-frictionless ability the Internet provides to shift data-based businesses across fiber cables in search of the friendliest home.

"The sovereignty question is one of the most interesting frontiers in cyberspace," says Bennett. He should know. While his company, IITI, is physically based in northern Virginia, it is incorporated in the Bahamas and operates primarily out of Ireland.

But the way IITI is set up is merely one way to shuffle the deck, Bennett says. With more than 200 global jurisdictions to choose from, and the ability to relocate a business at the speed of a mouse click, the process of building new global business architectures from the modem up is just getting started.

Overtime, all this border-hopping may lead to a showdown between entrepreneurs and the forces of control at the local, domestic and international levels. But it's an open issue whether more than 200 governments can clamp down without sacrificing beneficial business experimentation.

Most experts agree on one point: Within today's increasingly open electronic borders, the possibilities look pretty limitless - at least for the little guy and at least for the short-term. In the words of one lawyer familiar with the issue: "It's pretty hard to arrest an electron."

WAGES OF CONFUSION

Most people have heard about the benefits of regulatory arbitrage -- and the horror stories -- even if they don't know its name. For every Chinese dissident spreading his views freely from the haven of a Silicon Valley Internet server, there's a would-be gangster, money launderer or pedophile plying his trade from an indifferent island, steppe or anarchic political entity. It is the middle ground, however, where the real opportunists are staking their turf. For the likes of Vincent Cate and others, global regulatory muddles spell one thing: money.

From sunny Anguilla, a British dependency, Cate runs a Web site (www.publicdata.com.ai) that provides access to various U.S. records. Many of these are mundane things like drivers' license data, but Cate's site also publishes hotter items like voter rolls and even criminal files. Some of these records are prohibited in the U.S. from being put online. Texas, for example, sells drivers' license records, but only on the condition that they not be posted on the Web, says Cate.