What do a now-deceased German playboy and the daughter of the former Philippine dictator have in common? What connects a Russian oligarch and the former campaign manager of the French president?
Gunter Sachs and Maria Imelda Marcos Manotoc, Mikhail Fridman and Jean-Jacques Augier have all parked assets in countries that expect little in taxes and guarantee absolute confidentiality. And they are not alone. More than 130,000 people do exactly the same thing, and those are only the ones whose names appear in a data set called "Offshore Leaks," which was analyzed by a group of international media organizations.
But the real scandal is much bigger than that, namely that no one knows how much money is on deposit in anonymous bank accounts in countries that are euphemistically referred to as tax havens. Estimates by the non-governmental organization Tax Justice Network put the figure at about €16 to 25 trillion ($21 to 33 trillion). In this manner, the native countries of these individuals and companies are deprived of hundreds of millions in taxes, sometimes legally but often illegally.
The billions deposited in offshore accounts come from the United States and the rest of North America, and recently from emerging economies and the Third World, as well. Many Russian oligarchs manage their companies through offshore firms, while wealthy Southern Europeans use offshore accounts to protect their assets from a collapse of the euro -- and from the taxman.
But it isn't only tax fugitives who use the discreet services offered by these countries.
A Global Shadow Realm
Drugs and other criminal funds are hidden and laundered there, shady deals are arranged, and hedge funds whose speculative activities could shake the financial system once again use them as a base.
As a result, a global shadow realm has developed in the last few decades, with bases on all continents, a parallel economy that escapes all democratic scrutiny, and from which many profit: banks that provide assistance to tax refugees, as well as attorneys and companies that devise sophisticated systems to obfuscate the path the money takes.
The number of tax havens has gone from a handful only a few decades ago to 60, 70 or even more today. Years ago the British Virgin Islands (BVI), Belize, the Cayman Islands, Cyprus and the Marshall Islands were, in some cases, dirt-poor -- until they decided to charge no or almost no taxes on money brought into the country, as well as guarantee the owners of the asset anonymity through company and foundation structures. In return, they collected fees from the offshore companies.
The British Virgin Islands, for example, transformed itself into one of the most affluent parts of the world in less than a generation, after the group of islands adopted laws to guarantee secrecy in financial transactions in 1994. Today the BVI, which is formally part of the United Kingdom and has a population of about 31,000, is home to almost half a million foundations and letterbox companies.
Trust companies and law firms worldwide help create such trusts and offshore companies. They include firms like Portcullis Trustnet in the Cook Islands and Commonwealth Trust Ltd. in the BVI, the companies whose 2.5 million documents are now making headlines. The purpose of their business is to establish anonymous trusts and letterbox companies for their generally affluent clients. But instead of the actual owners, the tax evaders use straw men as the offshore companies' supposed shareholders and managing directors. A deed of trust between the customer and the trustee ensures that the funds are managed in the customer's interest.
For the last two decades, the European Union and the Organization for Economic Cooperation and Development (OECD), the club of industrialized nations, have insisted again and again that they intend to dry out these fiscal swamps. But so far the differing national interests of the member states have largely stood in the way of effective international agreements. In the fight for international capital and jobs, there are diverging opinions on where legitimate tax competition ends and unfair competition begins.
'The Kind of Tax Scam We Need to End'
That could now change, and Offshore Leaks seems to have come at the right time. The determination to address abuses has grown considerably, at least in the United States and Europe.
In his first election campaign, US President Barack Obama called for clamping down on tax havens. In one speech, he gave a detailed description of the Ugland House in the Cayman Islands, where more than 12,000 companies are registered, saying, "either this is the largest building in the world or the largest tax scam in the world." He added: "And I think the American people know which it is. It's the kind of tax scam that we need to end."
The debt-ridden countries of the Western world can no longer afford to be deprived of such massive revenues. In addition, the public is sharply critical of the fact that some wealthy people can escape their responsibility for their countries through tax flight, even as the gap between rich and poor widens. Taxpayers also have trouble understanding why the euro countries are using their money to rescue banks, while the banks are simultaneously helping the wealthy shelter their money from the tax authorities.
Almost all major German banks have branches and subsidiaries in a number of tax shelters. According to its annual report, Deutsche Bank has 13 subsidiaries in Singapore alone. And according to the Offshore Leaks data, Germany's largest bank has used its Singapore office to establish 300 trust companies and foundations in tax shelters.
Germany's Commerzbank, which received a government bailout, insurance companies like Allianz and state-owned banks like LBBW and HSH Nordbank, also operate subsidiaries in Singapore. HSH, whose survival is still a heated subject of debate among German politicians, also has a presence in exotic places like the Majuro Atoll in the Marshall Islands.
There can be many motives for the German financial sector's fondness of tax havens. But institutions where portfolio management and financial consulting for the wealthy play an important role are especially active in the offshore arena.
Deutsche Bank uses the websites of its offshore subsidiaries to actively recruit wealthy customers. The bank also officially confirms that it offers its affluent customers services like the establishment of trust companies, albeit under the condition, as it notes, that their tax affairs are handled legally.
'Tax Optimization, not Evasion'
In fact, businesses in all industries use tax havens to optimize their tax burdens within the letter of the law. "Of course banks advise their customers on setting up foundations and trust companies. As a rule, this is for purposes of tax optimization, not evasion," says Christoph Kaserer, a professor of finance specializing in banking at the Technical University of Munich. Publicly traded companies that pay more taxes than necessary, he says, must justify their actions to their shareholders and, in extreme cases, make themselves liable to pay damages. Nevertheless, says Kaserer, publicly traded companies in Germany have an average tax burden of 30 percent.
Deutsche Bank also reports an average tax rate of this magnitude. Nevertheless, the company's tax experts were recently called before the financial committee of the German parliament, the Bundestag, to justify their tax policy. The inquiry was triggered by a remark the bank had made in its annual report, stating that it partially attributes its tax rate to an "advantageous geographic distribution of consolidated profits."
The lawmakers suspected that the bank was deliberately shifting profits to tax havens. "When a bank has more than 2,000 subsidiaries, with 500 of them in tax havens, it makes sense that there are tax reasons for that," says Lothar Binding, a member of the center-left Social Democratic Party (SPD) on the Bundestag's Finance Committee.
Critics find the industry's claims that it doesn't support tax evasion hard to believe. Although banks require their customers to certify in writing that they do not engage in tax evasion, there is reason to suspect that they do this primarily to cover their legal bases. "This formally legal pseudo-correctness should no longer be allowed," says Binding.
He wants banks to have to take more responsibility for the questionable business dealings of their customers. "If banks were required to report such transactions in Germany, it would be easier to assess whether customers are truly acting within the law when it comes to taxes," he says. Binding also believes that tougher sanctions are the right approach. "If banks don't have to worry about losing their licenses, it will not be possible to effectively put a stop to questionable transactions."
It is quite possible that Offshore Leaks will now give a boost to such efforts. The data will also have "political consequences," says Kaserer. "If there are reactions directed against countries that have made tax optimization and evasion their business model, it's to be welcomed."
A Deterrent Effect
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.
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