Companies that actively used offshore accounts to minimize taxes are now assessing their chances of being caught
The German government has fast-tracked approval of a bill that will tighten the prosecution of tax evaders. The bill, proposed by Finance Minister Peer Steinbrück, will give tax authorities the right to demand much more comprehensive reporting from citizens on transactions involving foreign accounts. Above all – for all transactions in countries whose financial rules do not comply with the standards of the Organisation for Economic Co-operation and Development (OECD). These include, for example, Switzerland and Liechtenstein.
Failure to provide such information will mean that a citizen automatically loses the right to any tax relief provided for by German law. Also, according to the bill, the list of documents that citizens with an annual income of more than €500,000 must submit to the tax authorities is significantly expanded.
Thus, Germany remains one of the most principled opponents of offshore zones. Of all the G20 members, the Germans are the most consistent. Following the London summit, a blacklist of countries that do not cooperate in increasing transparency and reducing secrecy of financial transactions was presented to the world with great fanfare. This list included Costa Rica, Malaysia, the Philippines, and Uruguay.
The OECD's choice, which compiled the list, immediately sparked a lot of jokes, since these countries can hardly be called leaders in the world of offshore. But this list did not last long – a few days later the Organisation for Economic Co-operation and Development backtracked: after protests from the blacklisted countries, it announced that all four countries had agreed to its financial rules. So today it can be stated that the OECD has no significant complaints against any of the 84 countries and territories it monitors.
Germany's Trouble
For Germany, the problem of citizens evading taxes through offshore is more than acute. According to estimates by the BBW agency, Germans are currently hiding about €485 billion in foreign accounts from their domestic tax authorities. Of this, €175 billion is in Swiss accounts, €85 billion in Luxembourg, and another €70 billion in Austrian accounts. The remaining money is distributed among financial institutions in Liechtenstein, Singapore, and other 'tax havens'. Unsurprisingly, the German government is one of the world's leading lobbyists for tightening legislation on tax evasion control.
At the London G20 summit, it was the German delegation, together with the French, that pushed through – despite opposition from Britain and China – a final declaration condemning countries that help EU and US citizens hide from taxes.
'Tax evasion is an extremely painful problem for Germany with a long history. For example, back in the 1970s, a number of German banks directly advised clients to open accounts at their Luxembourg branches. Of course, this topic is still very relevant today. And after the Liechtenstein scandal, it has become particularly acute again,' says Rudolf Mikus, a tax law expert at the leading German law firm Beiten Burkhardt.
The aforementioned Liechtenstein scandal was an operation by German intelligence services last spring to catch tax evaders. At that time, agents of the German foreign intelligence service BND purchased a stolen disk containing a database of German bank clients from an anonymous clerk at Liechtenstein's LGT bank for €4.2 million. The amount of the reward was agreed at the level of the German government, approved by German Finance Minister Peer Steinbrück, and paid from the ministry's funds. It was worth paying. After analyzing the data, the German prosecutor's office was able to open hundreds of criminal cases for tax evasion, including against former head of German Post Klaus Zumwinkel, who, as the investigation proved, underpaid €1.2 million to the treasury.
The purchase of the stolen disk drew fierce criticism from the Liechtenstein authorities, who directly accused the German government of receiving stolen goods, and at the same time led to hundreds of German tax evaders voluntarily turning themselves in to the country's law enforcement agencies with confessions. The fact is that German law allows citizens who confess to tax evasion to avoid punishment – provided they pay the full tax debt plus standard bank interest.
In 2005, the German government declared a tax amnesty – anyone who confessed to tax evasion and returned the money to the country avoided punishment. The pre-election initiative of Gerhard Schröder's government sparked a heated public debate about whether it was fair to forgive the sins of the rich, but yielded little result. Instead of the expected €5 billion, only €1.4 billion returned to the German treasury.
The German authorities had to once again rely on strict control – and set up police checkpoints at borders with 'tax havens', stopping cars and checking them for the transport of large amounts of cash. In fact, the transport of cash withdrawn in Liechtenstein or Luxembourg remains the weakest link in tax evasion schemes. For example, during the pan-European police operation 'Athena' conducted by EU law enforcement in September 2007, German customs alone seized about €5.5 million. And over the entire past year, German customs seized €21.4 million in illegally imported and exported euros at the country's borders.
Everyone Under Control
Tightening control over citizens' transactions is a common trend in the fight against 'tax havens'. According to some analysts, even the traditionally offshore-friendly United Kingdom is following this trend. 'At first glance, the British cling to historically formed tax havens within the British Commonwealth. But that is largely a manifestation of a characteristic British trait – they have too much respect for their historical absurdities, take the royal family for example. That does not mean they are supporters of offshore as such. All British officials I have spoken with are seriously concerned that British taxpayers are evading British taxes through offshore. The UK has exactly the same interest in fighting tax evasion as other European countries,' believes Rudolf Mikus of Beiten Burkhardt.
The main problem for anti-tax evasion campaigners is that entire banking groups are working against them. For instance, since the mid-2000s, the U.S. government has been investigating the activities of consultants from the Swiss bank UBS who were heavily involved in servicing American citizens evading taxes. The scale of UBS employees' involvement in illegal operations was staggering. As early as the end of 2007, UBS manager Bradley Birkenfeld confessed to a U.S. court that he regularly helped the bank's clients smuggle large sums of money and valuables. According to Birkenfeld, 'on behalf of the bank,' in the period before 2005, he illegally transported about $200 million in cash and valuables across the U.S. border.
The investigation into UBS's activities in facilitating U.S. citizens' tax evasion sparked genuine outrage among U.S. authorities. 'Offshores are waging a real economic war against the United States,' stated rather sharply the chairman of the commission investigating tax evasion, Democratic Senator Carl Levin.
In February 2009, as a result of the investigation, U.S. authorities imposed a fine of $780 million on UBS. The bank's run of bad luck did not end there: in early April, it became known that UBS management had banned its consultants – more than a thousand people in total – from traveling outside Switzerland to meet with clients. Swiss bankers seriously fear that their employees could be arrested or charged with aiding tax evasion in other countries – so now all communication with clients must be conducted only by phone or email.
'The United States has been and remains the driving force in the fight against tax evasion. All other states are more or less following in the American wake. Germany may criticize the U.S. for interfering in the private sphere, but sooner or later European countries do what the Americans have already done. Although German authorities are often accused of excessive zeal in searching for suspects, compared to U.S. authorities, German agencies have almost no powers. U.S. intelligence services, such as the FBI, have such broad access to financial data that German law enforcement can only dream of,' says Rudolf Mikus.
Main offshores
However, there is also a directly opposite view on the policy of the US and Britain regarding offshores: the US exchanges information automatically only with Canada, which draws criticism in Europe. Luxembourg's Prime Minister Jean-Claude Juncker even called the United States 'the biggest offshore.'
Every year, 2 million companies are created in the US without disclosing their owners' identities. Many consider this mechanism one of the main ways to avoid taxes. Moreover, today it is easier to open an anonymous bank account in the US than on many offshore islands, for example in Bermuda. Even in Britain, you can open an anonymous bank account (registered to an anonymous 'shell company') for just $750.
This is precisely why the current debate on offshores has led to a surge of criticism directed at the developed countries themselves. 'The problem of financial opacity originates from developed countries, not from tropical islands. So it needs to be solved starting with developed countries, not from the other end of the financial conveyor belt,' believes Julian Jessop, chief economist at the London research center Capital Economics.
It is no secret that offshore financial centers have established relationships with financial centers in developed countries. Thus, 'tax havens' attract capital that is then reinvested in major markets. Funds from numerous Caribbean offshores eventually end up on Wall Street in New York, and from the Channel Islands and the Isle of Man – in the City of London. Unsurprisingly, in a recent interview with Expert, the well-known French economist Jacques Attali called London 'the main real offshore in the world.'
Without such sources of financing, the mechanism of leading financial centers that has been formed over decades breaks down. It is for this reason that offshores, apparently, are not going anywhere, although the rules of their operation may change significantly in the coming years.
The dust must settle
Although developed countries began actively fighting offshores back in the mid-1990s, the number of actual offshores in the world has rather increased than decreased. The current stage of the fight is driven by two reasons. 'First, globalization has simplified the execution of transactions and the use of offshores by companies, which greatly irritates developed countries. Second, the financial crisis began, the origins of which many see in insufficient transparency of financial operations. For politicians and voters, 'tax havens' have become a very serious irritant,' explains Jan Randolph, an economist at the research center IHS Global Insight.
The OECD and individual countries, primarily the US and EU states, began forcing offshore jurisdictions to disclose more and more information about financial activities. Thus, in just one week in mid-April, Bermuda, a popular offshore jurisdiction among American and British companies, signed eight agreements on tax cooperation. Many other countries and territories traditionally considered offshore were forced to take similar steps.
“The era of banking secrecy is over. More progress has been made in the last few weeks than in the previous ten years,” said OECD Secretary-General Angel Gurría. Most offshore jurisdictions announced significant concessions, largely in response to the change of administration in Washington and the unrelenting years-long pressure from Germany and France.
But the announced measures do not mean that the situation with offshore jurisdictions has fundamentally changed. “A lot has been said and announced, but the question now is what exactly and how quickly will be implemented. Before offshore jurisdictions and those who use them understand the new rules of the game, the dust must settle,” believes Jeremy Tidd, consultant at the consulting firm Octopus Group. Thus, firms that actively used offshore jurisdictions to minimize taxes are now assessing their chances of being caught. And they are looking at those offshore jurisdictions where transparency will be minimal. Offshore jurisdictions, in turn, are trying to assess their economic prospects – they are thinking about what will happen to them when they succumb to pressure from developed countries and become more transparent.