Tax Fraud and Money Laundering Today - Lessons From Germany?
blurb:isstoday:05032008liechtenstein
05 March 2008: Tax Fraud and Money Laundering Today – Lessons From Germany?
A prominent Liechtenstein bank, the LGT Bank, is currently under close scrutiny in what has been described as ‘the biggest complex of investigations ever initiated for tax evasion in the Federal Republic of Germany.’ The investigation into possible tax evasion by German nationals through various trusts and other entities in Liechtenstein has raised eyebrows in financial investment and law enforcement circles around the world. The fact that the LGT Bank is owned by the royal family of Liechtenstein appears to have added spice to the investigation.
The Liechtenstein affair first emerged in mid-February 2008, with a raid on the premises of the chief executive of Deutsche Post AG and on those of the head of a large southern German food company. Both were suspected of massive tax evasion, running into millions of Euro. It was alleged that the proceeds were stashed away in the vaults of Liechtenstein’s financial institutions, among them LGT and the Liechtenstein subsidiary of Swiss bank Vontobel. The names of the high-profile suspects, and those of between 600 and 700 others, had appeared in a list on a compact disc stolen from LGT by a former employee. The disc was offered first to tax authorities in the United Kingdom in 2006, but they turned it down. A subsequent offer to the German secret service was successful. The Germans snapped it up for a ‘mere’ 4.2 million Euros (about R43 million).
Liechtenstein is a small principality of 35,000 residents wedged between Switzerland and Austria. It is known as a tax haven, levying as little as 0.1% tax on offshore trusts. This has increasingly brought it into conflict with some of its neighbours, who desperately need to improve tax revenues in order to support aging populations. In 2002, the Organisation for Economic Co-operation and Development (OECD) fingered Liechtenstein as an uncooperative tax haven, on account of its unwillingness to open up its notorious banking secrecy laws. In the current investigation German tax authorities are scrutinising all transfers of funds to banks and other financial institutions in Liechtenstein. Some banks have been ‘raided’ and more than a hundred suspects have owned up to ‘tax irregularities’ and have volunteered to pay what they owe. Germany claims that its tax inquiry is not about dictating what should be the appropriate level of tax, but is instead aimed at driving the message home to tax dodgers and un-cooperative tax havens alike that the game of playing cat and mouse with tax regimes is over. Liechtenstein has reacted angrily to the German probe. Crown Prince Alois von Liechtenstein recently denounced the investigation as illegal, and threatened action in the courts.
The bigger issue that the ongoing inquiry raises is how a country adversely affected by tax evasion should respond when it identifies where the illicit proceeds end up. Investors are allowed to cherry pick the best place to grow their wealth but they are normally obliged to inform the authorities in the country where they are liable to pay tax. At the same time, tax authorities around the world are interested in establishing whether their citizens are cheating on tax with the connivance or assistance of foreign countries. Finland, Sweden, Norway, the United Kingdom and the United States are also reported to be investigating financial dealings linked to Liechtenstein. UK authorities have since acquired their own copy of the disc, for the knock down price of 100 000 pounds (R1,5 million).
The South Africa Revenue Service (SARS) has long suspected that some high-end taxpayers, those earning between R5m and R40m a year or with net assets exceeding R75m, are cheating on their tax. The ‘top 500’ have been under scrutiny by SARS, assisted by the Special Investigating Unit and the Directorate of Special Operation, for more than a year. The outcome of this investigation remains to be seen.
South Africa has rules that require disclosure of certain schemes or arrangements to SARS when income tax returns are filed. The rules are intended to make South Africa compliant with anti-money laundering legislation and to assist with the tracking and tracing of money worldwide. The effectiveness of these laws has yet to be tested. Meanwhile, the threat of money laundering remains very real. There is significant tax evasion through offshore vehicles. Trusts and foreign jurisdictions are used to hide true ownership in order to evade tax, as the case between Noseweek and First Rand Bank revealed. One of the lessons from the Liechtenstein affair is that countries following tax dodgers may have to act unilaterally. SARS estimates that South Africa may well be losing R64 billion ($9.1 billion) to tax havens annually. The tax and exchange control amnesty, which ended in 2006, provided evidence of the scale of the problem. Taking advantage of the amnesty, defaulting taxpayers repatriated billions of rands, a significant boost in revenue for South Africa. The number of wealthy South African with disposable incomes of around $1 million (R7.3 million) has increased phenomenally in recent years – 15.9% in 2005 alone – and this raises the probability of increased use of offshore investment as a means of evading taxes.
South Africa may not be as blessed as Germany in receiving unsolicited offers of incriminating information from foreign whistleblowers. One of the lessons from the Liechtenstein affair is that countries following tax dodgers may have to act unilaterally. If a leading economy like Germany could not rely on its membership in organisations like the OECD to pressure Liechtenstein, one can imagine that South Africa will have an even more daunting challenge when faced with a similar situation.
Thobani Matheza: Researcher, Organised Crime and Money Laundering Programme, ISS
