EUROPE: In Europe, widening probe targets tax haven

Nearly two decades after taking
the helm of Deutsche Post, Klaus Zumwinkel had transformed Germany's
national postal service into a global mail and logistics giant with
annual revenues of €66 billion ($102 billion) - more than double those
of FedEx. A director on the boards of Morgan Stanley, Deutsche Telekom,
and Lufthansa, he was one of Germany's most prominent executives.

Then, on Feb. 14, he surrendered to police
amid suspicion that he evaded €1 million in taxes. The next day, he
resigned, becoming the first to fall in a massive probe that has
broadened to nine other countries.

But even as Germany conducts its biggest
tax-evasion probe ever, experts warn that technological advances and
opaque banking practices are making it easier for individuals to stash
trillions of dollars a year in havens such as Liechtenstein, Monaco,
and Luxembourg.

"In this new, more globalized, integrated
world, where you can go on to the Internet and open a secret offshore
bank account in eight minutes, it's getting easier for a wider spectrum
of the population to hide assets offshore and more difficult for tax
authorities to follow the financial trail," says Grace Perez-Navarro,
deputy director at the tax unit of the Organization for Economic
Cooperation and Development (OECD) in Paris.

The OECD and the European Union (EU) have
led the way in tackling tax evasion, and countries such as Ireland,
Italy, and the Netherlands have all reported minor successes or
launched new initiatives in recent months. The German probe, based on a
list of 1,400 alleged tax cheats provided on CD by a paid informant,
has yielded more than 300 suspects and $47 million in recovered taxes.

German tax inspectors are expected to
launch a new round of raids shortly, and Spain, Britain, Australia, and
the US are conducting their own investigations - some based on the same

Liechtenstein, which has identified the
informant as Heinrich Kieber, a former employee for a subsidiary of the
royal family's bank, LGT, has contested the legality of the
information. Germany's domestic intelligence services paid a reported
$7.5 million to obtain and verify the lists, $6.2 million of which was
pocketed by the informant.

The scope of the problem

Tax Justice Network (TJN), a coalition of campaigners opposed to tax
havens, put the amount of personal wealth held offshore at $11.5
trillion - more than four times the total US national budget for 2007.
The OECD posits a more conservative figure: $5 trillion to $7 trillion.

In total, TJN estimates that the world's exchequers are deprived of at least $250 billion a year. Britain reckons its annual
income-tax shortfall is $40 billion, Germany $30 billion, and the US as much as $100 billion a year.

havens have declared war on honest taxpayers," says US Sen. Carl Levin
(D) of Michigan, who along with Sen. Barack Obama (D) of Illinois is
co-sponsoring the "Stop the Tax Haven Act," introduced last year. "What
this [German scandal] demonstrates again is that tax-haven abuses are a
worldwide problem."

It may also have unsettled some tax
dodgers. Mr. Zumwinkel was the most high-profile of more than 160
suspects to be netted, and more than 150 have voluntarily come forward.
Since then, dozens of Dutch nationals have also volunteered information
about their savings. And there could be more: Last week, German
newspaper Die Welt reported that a former employee of a Swiss bank
offered to sell German officials files listing more than 30,000 account

Britain, meanwhile, has written to 5,000
citizens believed to have offshore accounts warning them to disclose
details of their savings, after an earlier initiative recovered $800
million. Ireland recently recovered almost €1 billion in an
investigation, while an Italian tax amnesty raked in €84 billion,
according to the OECD.

OECD: 'excessive' banking secrecy

Tax experts say it is perfectly legitimate to bank offshore for a number of reasons such as lower costs or lighter regulation.

needs to be made clear is that there is nothing illegal about holding
bank accounts in Liechtenstein and wanting secrecy as long as you pay
the right amount of tax in your own jurisdiction," says Chas
Roy-Chowdhury, head of taxation at Britain's Association of Chartered
Certified Accountants.

He says part of the objection is that
smaller jurisdictions can afford attractive, low tax rates that result
in "capital flight" from bigger countries. "Governments should open
themselves up to the wind of global competition and accept that they
need to run efficiently to keep tax rates low."

Ms. Perez-Navarro insists that it is
"excessive" banking secrecy - and not the competitive tax regimes -
that governments are objecting to. The OECD has fostered a range of
international agreements to share information on bank accounts, which
has increased cooperation from formally secretive havens such as
Bermuda and Switzerland.

Perez-Navarro adds that individuals should
have the right to a certain banking confidentiality, but that when
investigators want to see numbers they should be handed over. "It's all
about establishing a balance between the individual right to privacy
and the law-enforcement need for information," she says.

How tax evasion is being tackled

such as Liechtenstein, Luxembourg, and Switzerland have long cited
their banking secrecy laws to avoid tackling tax evasion, say experts.
The three nations "cooperate on any other crime: drugs, traffic
violation, prostitution, weapons dealing, everything," says Caspar Von
Hausenschild, a former banker who sits on the board of the German
branch of Transparency International. "But there is no cooperation on
tax evasion and tax avoidance. This is a scandal that's been discussed
in Brussels over the last 20 years, but finance officials have never
been able to close any loopholes."

In recent weeks, German Chancellor Angela
Merkel has met with Prime Minister Otmar Haslar of Liechtenstein and
Prince Albert of Monaco, demanding they overhaul their banking sectors
and begin complying with European tax disclosure requirements. German
officials are also lobbying the EU to rewrite tax-evasion legislation
to target countries with strict banking-secrecy laws.

"I think that these countries, and that
includes Luxembourg, with a scandal like Liechtenstein, will probably
come under somewhat more pressure to abolish their bank secrecy rules,"
says Frederic Feyten, a tax expert at the law firm of Oostvogels
Pfister Feyten in Luxembourg.

Mr. Feyten also says Brussels should recast
its 2005 savings tax directive, which requires EU countries to report
foreign money in their bank accounts. Austria and Luxembourg, and
non-EU Switzerland, have a special agreement whereby they don't
disclose account holders in exchange for charging them a withholding
tax - now 25 percent - which would be split between the country where
the account is held and the country where the account holder is from.
Liechtenstein also charges a withholding tax, but doesn't share that

European finance ministers earlier this month also backed calls for reform. Austria and Luxembourg resisted.

Christensen, director of TJN and former economic adviser to the
government in the reforming tax haven of Jersey, says the tax directive
generates only small change. The problem, he says, is that wealthy
individuals who bank offshore do not open easily traceable accounts.

"They'll set up ... a trust in Luxembourg
that owns a company registered in Jersey that has a bank account in the
Cayman Islands," he says. "The EU Savings directive will not catch

Germany is also considering its own
unilateral action against tax havens, such as new regulations requiring
German banks to declare wire transfers received from Liechtenstein and
a surcharge on those transfers. "That's quite a penalty which would
deter legitimate and illegitimate business, but Germany may feel a
blunt instrument is necessary to deal with an uncooperative tax haven,"
says the OECD's Perez-Navarro.

AMP Section Name:Corruption
  • 106 Money & Politics

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