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Global Resistance to Tax Havens Grows

Part 2: A Deterrent Effect

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Monday, 4/8/2013   01:48 PM

Some 86 journalists from 46 countries spent 15 months analyzing the data, with the help of special computer software and supported by programmers in Germany, Great Britain and Costa Rica. So far the trails have led to 10 tax havens. Most names on the lists are from China, Hong Kong and Taiwan, while another important group of customers are from Russia and the former Soviet republics.

Several hundred Germans are also reportedly affected, although German tax evaders have traditionally tended to favor Switzerland or Liechtenstein. The principality was essentially around the corner, German was spoken there, and there was close cooperation with the Swiss banks that managed the money of the rich and powerful. In the 1990s, even Commerzbank offered its affluent customers the Liechtenstein model for tax optimization.

There, the money was deposited into foundations managed by a trustee, while the names of the real owners did not appear in any public registry. And because Liechtenstein's politicians had an interest in the influx of wealth from around the world, they initially blocked any efforts by foreign tax authorities for legal assistance.

But then there was a leak in Liechtenstein, just as there is a leak today with the Offshore Leaks data. An employee of trustee Herbert Batliner siphoned off his customer data, which eventually ended up with the German tax authorities. Investigations were launched against hundreds of tax evaders, including well-known corporate families and the center-right Christian Democratic Union party, which squirreled away its illegal money there in what eventually became a massive slush fund scandal.

Suddenly Liechtenstein, long a monetary fortress, was no longer secure, and it continued to crumble when Germany and its other EU neighbors increased pressure on the principality. Today Liechtenstein even cooperates in cases involving only the suspicion of tax evasion.

The release of information like the Offshore Leaks data still has a deterrent effect. Tax evaders who already have a bad conscience or are plagued by the fear of being found out have a tendency to turn themselves in.

Legally Controversial 'Bycatch'

This also became evident when CDs containing tax information from Switzerland were acquired in recent years. Several German states purchased various CDs with the names of presumed tax evaders. The western state of North Rhine-Westphalia, in particular, benefitted from the information. When the state bought a CD with Swiss data for the first time, in the spring of 2010, the number of people turning themselves in quickly increased from a few hundred to about 5,000 in only a few months.

But the deterrent effect quickly wore off. By the end of 2012, the number of tax evaders turning themselves had only increased by 2,200 over 2010.

The material on the CDs was also significantly less explosive than hoped. By the end of summer last year, judicial authorities in North Rhine-Westphalia had concluded about 900 cases. Only in 11 cases, or about 1 percent, were punishments imposed. Ninety percent of the cases were discontinued with no consequences at all.

The purchase of tax CDs was often the only way to track down tax evaders, but it was always legally controversial. The German foreign intelligence agency, the BND, was even accused of dealing in stolen goods when it acquired one of these CDs from a former employee of the Liechtenstein bank LTG. After that, then BND President Ernst Uhrlau prohibited the purchase of further CDs.

The BND's position changed when Gerhard Schindler became its president. Now sources within the agency say that it is also responsible for cases of money laundering, international crime and terrorism.

If there happens to be tax information on an acquired CD, the BND argues, it is seen as "bycatch" and can be made available to the tax authorities. The BND's position is that if informants break the law by selling such data, they are responsible for their own actions. But there have been no such offers to the agency since Uhrlau's replacement.

To avoid being dependent on the acquisition of data CDs, the German government negotiated a bilateral tax treaty with Switzerland. But the deal fell through because of opposition in the Bundesrat, the legislative body that represents the German states, and because tax evaders, as the SPD believes, would have gotten off too lightly with a relatively low payment of tax arrears. "The German-Swiss treaty would have allowed for bigger holes than in a piece of Swiss cheese," SPD chancellor candidate Peer Steinbrück said in a SPIEGEL interview.

Many at the Finance Ministry in Berlin and in parliament hope for a new attempt to forge a tax treaty after the federal election this autumn. But Switzerland has already indicated unofficially that it is no longer interested in a comprehensive solution. Difficult negotiations are in the offing.

The United States had an easier time of it. It wrested a much better agreement from the Swiss by threatening to banish the country's banks from New York in the future. That was all it took. But the German government is barred from employing such repressive tactics. As a financial center, Frankfurt isn't nearly as important and appealing as New York. Besides, the German government, in its efforts to attack tax havens, is always constrained by the need to take its partner countries into account.

Combatting the Tax Haven Epidemic

No number of pithy declarations of war against the world's tax havens can disguise the fact that there are EU member states that pride themselves on their special discretion when it comes to financial and fiscal matters. In addition to Britain's Channel Islands, Austria, Ireland, the Netherlands and Luxembourg also exhibit some clear characteristics of tax havens.

The latter already appears to be feeling at least some pressure from Offshore Leaks. In an interview published Sunday in the Frankfurter Allegemeine Sonntagszeitung, Luxembourg Finance Minister Luc Frieden said his country was considering easing its banking secrecy rules. "We want an intensified cooperation with foreign tax authorities," he said, noting that there is a clear trend towards the automatic exchange of information. "In contrast to the past, we no longer strictly reject this," he added. Until now, the country has blocked any strict EU directive on taxation of foreign-held savings that would require such automatic exchange of data, ensuring favorable advantages for investors in the country.

On Friday, German Finance Minister Wolfgang Schäuble said there are two EU countries that "make use of special rules for themselves," a clear reference to Austria and Luxembourg. "I assume that will now change, also through such developments." During the Cyprus crisis, representatives of several euro-zone member states had indirectly called for Luxembourg to rethink its business model and to reduce its oversized financial sector.

Initiatives are also underway in Brussels to tackle tax havens. European Commissioner for Taxation Algirdas Semeta presented a plan of action last December. It contains more than 30 eminently reasonable proposals to combat the tax haven epidemic. But it isn't being taken very seriously in European capitals. The EU treaties stipulate that taxes are a national matter, and the finance ministers are jealously ensuring that it remains that way. Joint tax rules would require the approval of all 27 EU member states, including those that profit from tax flight today.

In the case of Cyprus, the other Europeans have only now, when the island nation is on the verge of bankruptcy, been able to insist on compliance with certain standards. With a low corporate tax rate of 10 percent, the Cypriots attracted many offshore companies that have deposited billions there. Now the corporate tax is at least being raised to Ireland's level of 12.5 percent.

The agreement that the troika negotiated with Cyprus contains a number of requirements to combat money laundering and tax flight. For instance, under a memorandum of understanding the Cypriots are now required to supply "adequate, accurate and timely information on the beneficial ownership" of Cypriot letterbox companies if requested by foreign tax authorities. The country is also being required to create a new registry with regulators for the many Cypriot trusts, which are generally foreign-owned.

This is precisely what experts like Raymond Baker are calling for to stop worldwide tax flight and money laundering. The director of US think tank Global Finance Integrity believes it is imperative that the names of the true owners of offshore companies, trusts and foundations be disclosed in a public registry, or at least to the authorities.

Bilateral Agreements

But governments aren't quite that far along yet. Still, the German government has agreed to exchange information with a large number of countries. Luxembourg, Liechtenstein, the British Channel Islands of Jersey and Guernsey, as well as Antigua and the Cayman Islands in the Caribbean are included in this group.

The agreements give German tax authorities the right to obtain information about German depositors when there is any suspicion of wrongdoing. The information can enable the treasury to collect outstanding taxes. This could also be helpful today, if the authorities, as demanded by Finance Minister Wolfgang Schäuble, actually obtain and are able to evaluate the Offshore Leaks data.

But what will be far more useful for Schäuble is something that the recent revelations have made clear to even the last tax evader: In the future, anyone who evades paying taxes won't feel safe anywhere in the world.

REPORTED BY SVEN BÖLL, MARKUS DETTMER, HUBERT GUDE, MARTIN HESSE, ARMIN MAHLER, CHRISTOPH PAULY, CHRISTIAN REIERMANN, JÖRG SCHMITT AND GREGOR PETER SCHMITZ

Translated from the German by Christopher Sultan

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