Stashes in Switzerland Berlin Accused of Being Too Kind to Tax Cheats

The German government's planned tax agreement with Switzerland looks set to collapse, due to resistance from the federal states who feel it is too lenient on tax cheats. Some experts say that Berlin should follow the American example instead and take a hard line with Swiss banks who help their clients avoid tax. By SPIEGEL Staff


In a building at the local tax office in Barmen, a neighborhood in the western German city of Wuppertal, there is a high-security room, a sort of command center for Germany's most feared tax investigators. This is where they keep their files and where they prepare for searches.

A short video has been shown there again and again in recent weeks. It depicts a conversation between a bank employee and a man posing as a customer. The conversation turns into a question-and-answer session on the subject of how Germans, with the help of a Swiss bank, can hide their money from the German tax authorities.

The answers relate to foundations, preferably in Singapore, which are used to conceal the true identity of the asset holders. But the managers of these foundations, who have Asian and American names, can still invest the money in Switzerland.

The video is probably six or seven years old and, contrary to rumors that were circulating last week, the scene it depicts is not current, as Swiss bankers have been quick to point out. They insist that nowadays customers are not encouraged to engage in tax flight.

Nevertheless, tax investigators find the video very enlightening. They have concluded that it's an instructional video for a major Swiss bank, and that it could very well serve as evidence that bank employees were systematically trained for years in how to help their customers evade taxes.

Dubious Tricks

Now, the video has caused a stir among German politicians as well, particularly because they will be voting on a new German-Swiss tax treaty in a few weeks' time. An already complicated issue has been turned into a matter of decency, morality and honor. At issue are questions like: What penalties do tax evaders and their accomplices at Swiss banks deserve? Is it fair if dubious tricks like those described in the video remain unpunished?

Tax investigators accuse the German government of being willing to accept a deal that will let criminals off the hook. Opposition politicians are also up in arms. Sigmar Gabriel, head of the center-left Social Democratic Party (SPD), has accused Swiss banks of engaging in "organized crime," while Green Party floor leader Jürgen Trittin has talked of a "slap in the face for all honest taxpayers." Just one year before Germany's national election, the coalition government of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union (CSU) and the business-friendly Free Democratic Party (FDP) finds itself in the middle of a debate on social justice. The center-right coalition is being accused -- once again -- of showing an astonishing degree of generosity to bankers and the rich.

The government's plan to end the decades-long battle over undeclared billions in Swiss accounts as smoothly and quietly as possible has totally failed. The purpose of a promised amnesty was to encourage the German holders of Swiss bank accounts to come clean and declare their assets to German tax authorities. Under the treaty negotiated by German Finance Minister Wolfgang Schäuble (CDU) and his Swiss counterpart Eveline Widmer-Schlumpf, Germans would merely have to pay moderate retroactive taxes on capital held in Switzerland and they would be off the hook.

But now the deal is on the rocks, because it is unclear whether the agreement will be approved by the Bundesrat, the legislative body that represents Germany's 16 federal states. The states in which the SPD forms part of the government have announced their intention to vote against the plan. "The tax agreement with Switzerland is dead," says SPD General Secretary Andrea Nahles, adding that any haggling before the Bundesrat makes its decision would be pointless. "The states in which the SPD forms part of a coalition government cannot vote for the plan. It is no longer politically justifiable."

Humiliating Blow

It would be a humiliating blow for both Finance Minister Schäuble and Chancellor Merkel, who reiterated her support for the planned treaty only last week. But many experts believe that the government now has the opportunity to embark on an overdue change in strategy. Instead of agreeing to questionable deals, Germany could take a tougher approach in the future, perhaps by tightening criminal legislation, proposes Thomas Kutschaty, justice minister of the western state of North Rhine-Westphalia. He believes that Germany could make an example of Switzerland, which could then serve as a model for the treatment of other tax havens, like the Cayman Islands and Singapore.

The alternative proposals in Germany are based on the approach taken by the United States, which is also negotiating a tax treaty with Switzerland at the moment. Under the agreement proposed by Washington, bankers could face prison terms if they were found guilty of helping US citizens evade taxes. The United States is convinced that leniency doesn't pay. A treaty that guarantees tax evaders both anonymity and freedom from prosecution, as provided under the proposed German-Swiss treaty, is out of the question for Washington.

Schäuble still hopes to succeed with the treaty and change the minds of some of the states that are co-governed by the SPD. From his perspective, leniency toward tax cheats is of secondary importance in a generally advantageous agreement, which will flush billions in new revenues into the coffers of the federal and state governments. Schäuble calls the plan a "pragmatic solution" and says that he doesn't understand all the fuss.

Schäuble is relying on driving a wedge between his opponents. He would have to get at least three states with the SPD in their governments to support the treaty in the Bundesrat vote, which is scheduled for late November. Five states -- Saarland, Rhineland-Palatine, Baden-Württemberg and the city-states of Hamburg and Berlin -- are considered to be on the fence. Schäuble and, if necessary, the chancellor, are prepared to offer concessions to secure the states' support. It is possible, for example, that the federal government will guarantee states a larger share of tax revenues.

But the SPD seems determined to topple the treaty. In a video conference on Monday of last week, Hannelore Kraft, the SPD governor of the western state of North Rhine-Westphalia, told party leaders about a CD that was recently purchased and contains data relating to possible tax evaders. The group agreed to commit, if possible, to vote no on the tax treaty. Even Hamburg Mayor Olaf Scholz, who has nothing against an agreement with Switzerland in principle, didn't dare to oppose the group consensus, merely asking his fellow party leaders "not to overinflate the rhetoric on this issue for political gain."

"The tax treaty is unacceptable, because, for the most part, it corresponds to the wishes of tax evaders, who hope to get off as cheaply as possible," said North Rhine-Westphalia Finance Minister Norbert Walter-Borjans (SPD). "Berlin will not contribute to a Bundesrat majority for the tax treaty in its current form," said Richard Meng, speaker of the Berlin Senate, the government of the city-state. Baden-Württemberg Finance Minister Nils Schmid (SPD) said: "The chances of approval have gotten worse." Finally, Rhineland-Palatinate Governor Kurt Beck stated that he did not see the treaty receiving a majority in the Bundesrat vote.

Sense of Justice

In many respects, the treaty violates the sense of justice of honest taxpayers. While ordinary citizens are expected to submit every receipt with their tax returns and pay taxes on even the tiniest amounts, the government wants to exercise leniency when it comes to those who have undeclared funds in Swiss bank accounts. The treaty would prohibit German authorities from actively pursuing the purchase of CDs containing data on tax evaders. "Germany allowed itself to be mercilessly fleeced in the negotiations," says Thomas Eigenthaler, chairman of the tax collectors' union DSTG.

Under the proposed agreement, someone who illegally moved €1.2 million ($1.48 million) in undeclared and untaxed funds to Switzerland 10 years ago and, thanks to compound interest, now holds assets worth €1.6 million, would only be required to pay 21 percent of the total value -- or about €340,000 -- to come clean. This single payment would settle all other obligations to the German tax authorities. But if the same funds had been properly declared and taxed in Germany, the tax liability would have been €770,000, or more than twice as much as the total under the treaty -- at least according to experts with the state Finance Ministry in North Rhine-Westphalia.

The treaty is even more favorable to tax evaders when compared with what happens if an individual turns themselves in to the authorities by making a voluntary disclosure. Under the current law, the tax evader in the example above would owe both the €770,000 in back taxes and the accrued fees and interest for late payment. In the end, according to the North Rhine-Westphalian Finance Ministry's calculations, they would owe €1.2 million -- more than three times their liability under the proposed tax treaty.

The new treaty would also guarantee anonymity for tax evaders. The Swiss bank would issue a certificate and transfer the funds owed directly to the German authorities. If tax investigators ever decided to come after the former evader, the bank's certificate would exempt him or her from prosecution.

The North Rhine-Westphalian Finance Ministry's calculations also show that most holders of Swiss accounts containing undeclared money would be subject to the lowest tax rate provided under the treaty which Schäuble negotiated. Officially, the rates range from 21 to 41 percent. In reality, however, about 80 percent of tax evaders will likely get away with the lowest rate, even on millions in previously undeclared assets.

Perfect Symbiosis

And there are plenty of those assets around. Up to €80 billion in undeclared funds from Germany are currently sitting in Swiss accounts. For decades, German tax fugitives and Swiss money managers lived in perfect symbiosis. Protected by bank secrecy laws, doctors, lawyers and business owners from Hamburg to Heidelberg moved their assets south to Switzerland. The additional funds enabled Swiss banks to pay for their expansion from the Zurich region into the global financial markets.

It all went smoothly, until modern information technology made it possible to store large amounts of data on small storage devices that could easily be taken out of the country. That changed everything.

In the spring of 2000, the public prosecutor's office in the western German city of Bochum received a CD containing information about a Liechtenstein trustee named Herbert Batliner. A friend of former German Chancellor Helmut Kohl, Batliner's clients included Princess Soraya, the second wife of the late shah of Iran, and former German show jumper Paul Schockemöhle.

A new business model had been created: the trade in tax data CDs.

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