In Europe, widening probe targets tax haven

Some 10 countries are investigating suspects, including the US, which estimates that it loses up to $100 billion a year in unpaid taxes.

Nearly two decades after taking the helm of Deutsche Post, Klaus Zumwinkel had transformed Germany's national postal service into a global mail and logistics giant with annual revenues of €66 billion ($102 billion) – more than double those of FedEx. A director on the boards of Morgan Stanley, Deutsche Telekom, and Lufthansa, he was one of Germany's most prominent executives.

Then, on Feb. 14, he surrendered to police amid suspicion that he evaded €1 million in taxes. The next day, he resigned, becoming the first to fall in a massive probe that has broadened to nine other countries.

But even as Germany conducts its biggest tax-evasion probe ever, experts warn that technological advances and opaque banking practices are making it easier for individuals to stash trillions of dollars a year in havens such as Liechtenstein, Monaco, and Luxembourg.

"In this new, more globalized, integrated world, where you can go on to the Internet and open a secret offshore bank account in eight minutes, it's getting easier for a wider spectrum of the population to hide assets offshore and more difficult for tax authorities to follow the financial trail," says Grace Perez-Navarro, deputy director at the tax unit of the Organization for Economic Cooperation and Development (OECD) in Paris.

The OECD and the European Union (EU) have led the way in tackling tax evasion, and countries such as Ireland, Italy, and the Netherlands have all reported minor successes or launched new initiatives in recent months. The German probe, based on a list of 1,400 alleged tax cheats provided on CD by a paid informant, has yielded more than 300 suspects and $47 million in recovered taxes.

German tax inspectors are expected to launch a new round of raids shortly, and Spain, Britain, Australia, and the US are conducting their own investigations – some based on the same informant.

Liechtenstein, which has identified the informant as Heinrich Kieber, a former employee for a subsidiary of the royal family's bank, LGT, has contested the legality of the information. Germany's domestic intelligence services paid a reported $7.5 million to obtain and verify the lists, $6.2 million of which was pocketed by the informant.

The scope of the problem

The Tax Justice Network (TJN), a coalition of campaigners opposed to tax havens, put the amount of personal wealth held offshore at $11.5 trillion – more than four times the total US national budget for 2007. The OECD posits a more conservative figure: $5 trillion to $7 trillion.

In total, TJN estimates that the world's exchequers are deprived of at least $250 billion a year. Britain reckons its annual income-tax shortfall is $40 billion, Germany $30 billion, and the US as much as $100 billion a year.

"Tax havens have declared war on honest taxpayers," says US Sen. Carl Levin (D) of Michigan, who along with Sen. Barack Obama (D) of Illinois is co-sponsoring the "Stop the Tax Haven Act," introduced last year. "What this [German scandal] demonstrates again is that tax-haven abuses are a worldwide problem."

It may also have unsettled some tax dodgers. Mr. Zumwinkel was the most high-profile of more than 160 suspects to be netted, and more than 150 have voluntarily come forward. Since then, dozens of Dutch nationals have also volunteered information about their savings. And there could be more: Last week, German newspaper Die Welt reported that a former employee of a Swiss bank offered to sell German officials files listing more than 30,000 account holders.

Britain, meanwhile, has written to 5,000 citizens believed to have offshore accounts warning them to disclose details of their savings, after an earlier initiative recovered $800 million. Ireland recently recovered almost €1 billion in an investigation, while an Italian tax amnesty raked in €84 billion, according to the OECD.

OECD: 'excessive' banking secrecy

Tax experts say it is perfectly legitimate to bank offshore for a number of reasons such as lower costs or lighter regulation.

"What needs to be made clear is that there is nothing illegal about holding bank accounts in Liechtenstein and wanting secrecy as long as you pay the right amount of tax in your own jurisdiction," says Chas Roy-Chowdhury, head of taxation at Britain's Association of Chartered Certified Accountants.

He says part of the objection is that smaller jurisdictions can afford attractive, low tax rates that result in "capital flight" from bigger countries. "Governments should open themselves up to the wind of global competition and accept that they need to run efficiently to keep tax rates low."

Ms. Perez-Navarro insists that it is "excessive" banking secrecy – and not the competitive tax regimes – that governments are objecting to. The OECD has fostered a range of international agreements to share information on bank accounts, which has increased cooperation from formally secretive havens such as Bermuda and Switzerland.

Perez-Navarro adds that individuals should have the right to a certain banking confidentiality, but that when investigators want to see numbers they should be handed over. "It's all about establishing a balance between the individual right to privacy and the law-enforcement need for information," she says.

How tax evasion is being tackled

Countries such as Liechtenstein, Luxembourg, and Switzerland have long cited their banking secrecy laws to avoid tackling tax evasion, say experts. The three nations "cooperate on any other crime: drugs, traffic violation, prostitution, weapons dealing, everything," says Caspar Von Hausenschild, a former banker who sits on the board of the German branch of Transparency International. "But there is no cooperation on tax evasion and tax avoidance. This is a scandal that's been discussed in Brussels over the last 20 years, but finance officials have never been able to close any loopholes."

In recent weeks, German Chancellor Angela Merkel has met with Prime Minister Otmar Haslar of Liechtenstein and Prince Albert of Monaco, demanding they overhaul their banking sectors and begin complying with European tax disclosure requirements. German officials are also lobbying the EU to rewrite tax-evasion legislation to target countries with strict banking-secrecy laws.

"I think that these countries, and that includes Luxembourg, with a scandal like Liechtenstein, will probably come under somewhat more pressure to abolish their bank secrecy rules," says Frederic Feyten, a tax expert at the law firm of Oostvogels Pfister Feyten in Luxembourg.

Mr. Feyten also says Brussels should recast its 2005 savings tax directive, which requires EU countries to report foreign money in their bank accounts. Austria and Luxembourg, and non-EU Switzerland, have a special agreement whereby they don't disclose account holders in exchange for charging them a withholding tax – now 25 percent – which would be split between the country where the account is held and the country where the account holder is from. Liechtenstein also charges a withholding tax, but doesn't share that revenue.

European finance ministers earlier this month also backed calls for reform. Austria and Luxembourg resisted.

John Christensen, director of TJN and former economic adviser to the government in the reforming tax haven of Jersey, says the tax directive generates only small change. The problem, he says, is that wealthy individuals who bank offshore do not open easily traceable accounts.

"They'll set up ... a trust in Luxembourg that owns a company registered in Jersey that has a bank account in the Cayman Islands," he says. "The EU Savings directive will not catch that."

Germany is also considering its own unilateral action against tax havens, such as new regulations requiring German banks to declare wire transfers received from Liechtenstein and a surcharge on those transfers. "That's quite a penalty which would deter legitimate and illegitimate business, but Germany may feel a blunt instrument is necessary to deal with an uncooperative tax haven," says the OECD's Perez-Navarro.