Trouble in Paradise Berlin Takes on the Tax Havens

The German government is applying pressure on offshore tax havens. It is also taking action against German banks operating in Switzerland, where they maintain accounts for shadowy Liechtenstein foundations. In a time of economic crisis, Berlin needs all the tax euros it can get.

By Beat Balzli, and Nana Gerritzen

Martin Maurer remembers that fateful gray November day all too well. Maurer runs the Association of Foreign Banks in Switzerland from his office above an upmarket men's clothing store only a stone's throw from Zurich's exclusive Bahnhofstrasse. The organization represents the interests of more than 150 financial institutions, 20 of them German.

On that day last November, Maurer received a number of calls from nervous fund managers, who were alarmed by a seven-page letter that Germany's Federal Financial Supervisory Authority (BaFin) had sent to all German banks with Swiss subsidiaries. The agency, based in Bonn, was asking unpleasant questions about an explosive subject. It wanted to know how many accounts the Swiss subsidiaries were managing for foundations and trusts, and how many of these foundations were headquartered in the tiny principality of Liechtenstein, which is famous as a tax haven.

The letter "was worded unclearly and not coordinated with the Swiss Financial Market Supervisory Authority," says Maurer. His concerns prompted him to meet with a few German members of his association 10 days later. The purpose of the meeting was to discuss how to interpret the BaFin letter, says Maurer, noting that the Germans "discussed how to respond."

The Bonn bank regulators, for their part, smelled a conspiracy and suspected secret agreements were being made. In mid-February, BaFin contacted several German banks with additional, more specific questions.

BaFin's unprecedented move is intended to apply pressure to banks as part of its fight against tax evasion. It is the discreet part of a two-pronged strategy with which Germany intends to overturn Switzerland's role as a tax haven as quickly as possible.

The public part of the campaign has been waged by German Finance Minister Peer Steinbrück over the past few months, who has made it into his personal crusade. On one occasion, Steinbrück threatened Germany's stubborn neighbor with the "whip," and on another he compared the Swiss to "Indians" who had apparently been successfully intimidated by the "cavalry." His attacks have routinely ruffled feathers in the diplomatic arena. Last week, the Swiss foreign minister summoned the German ambassador to her office and described Steinbrück's remarks as "unacceptable, aggressive and insulting." Steinbrück, for his part, has complained about threatening letters from Switzerland describing him as a "Nazi henchman."

The tone has turned ugly in the eternal battle between finance ministers and tax evaders. While the investment industry is constantly finding new ways to shelter its clients' assets from taxation, governments worldwide are proceeding against tax havens with almost unprecedented vehemence.

When the 20 leading industrialized and emerging nations, the G-20, meet in London next week for the second world financial summit, a political project will be on the agenda that was already believed to have failed internationally: the fight against tax evasion and tax havens. Ironically, the global financial crisis provides an opportunity, for the first time in years, to curb tax evasion worldwide.

Tax authorities have scored a number of successes in recent months. In February of last year, the spectacular raid of the offices of Deutsche Post and the home of its chief executive, Klaus Zumwinkel, who had evaded German taxation by transferring millions to a bank in Liechtenstein, brought the problem into focus.

After that, the United States, using political and economic pressure, cracked through the barrier of Swiss banking secrecy to obtain information on the accounts of US citizens who were customers of UBS, a major Swiss bank.

Governments worldwide discovered that there is a reciprocal relationship between tax havens and the fragility of the global financial system. In addition to protecting tax evaders, banking secrecy arrangements in offshore centers helped the banks escape the scrutiny of government regulators for at least some of their reckless lending practices.

Most of all, however, there is a perfectly mundane reason why the industrialized nations are upping the pressure on tax oases: With the global economic crisis worsening from month to month, finance ministers need the outstanding tax revenues from their citizens. A surfeit of bad economic news is taking government budgets beyond the pain threshold. In such dire economic times, tax evasion is treated as a felony and those who facilitate it in tax havens as accomplices.

The unfettered global movement of capital has made both corporations and the assets of private citizens more mobile. The Boston Consulting Group estimates that $7.3 trillion (€5.4 trillion) in personal wealth is held in offshore centers and tax havens, including about $2 trillion (€1.5 trillion) in Switzerland alone (see graphic).

Graphic: Tax havens

Graphic: Tax havens

The BaFin survey of 31 German banks, conducted on behalf of the Finance Ministry, revealed how often dubious arrangements are involved. With the aim of reviewing compliance with the obligation to exercise diligence against money laundering, Steinbrück's team wanted to obtain "an overview of the business relationships between the banks' subsidiaries and holdings in Liechtenstein and Switzerland and foundations established under Liechtenstein law and other nontransparent vehicles," a ministry spokesman confirmed.

Steinbrück's experts were amazed at the results. According to one insider, the banks reported that they maintained "accounts of at least several hundred Liechtenstein foundations" through their Swiss subsidiaries. The Swiss subsidiary of Deutsche Bank manages a large share of these accounts. The bank, like other banks with significant Swiss business, such as Commerzbank and its subsidiary Dresdner Bank, has refused to comment.

The results of the survey have already had consequences. The regulations on the obligation to exercise diligence were sharpened in the context of recent reforms to German bond legislation. Starting in April, banks will be required to instruct their subsidiaries to "terminate non-transparent business relationships," the ministry said. The goal is to put an end to German banks' dealings with shadowy Liechtenstein foundations. And to ensure that bankers are not tempted nonetheless, the finance ministry announced "special audits by BaFin."


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