A global crackdown on tax havens?

Armed with a leaked list of tax-haven account-holders, the German authorities are hunting down tax evaders. Is this crackdown just the beginning, asks Jody Clarke

Why has Liechtenstein accused Germany of Gestapo-like tactics'?

The BND, Germany's secret service, has covertly bought details of 1,400 clients of LGT Bank in Liechtenstein. Handed over on a CD, the information was collated by 42-year-old whistleblower Heinrich Kieber, a former employee of the bank.

It's thought he was paid between $6m and $7.4m for the data, which is being used by German tax authorities to track down tax evaders. The German tax union reckons that Germany loses about e30bn a year to evasion, and its assault on the Alpine tax haven is already reaping results. Former Deutsche Post chief executive Klaus Zumwinkel is the highest-profile casualty so far, but 91 people have confessed to tax evasion and already e27.8m in back taxes has been repaid.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Crown Prince Alois, the principality's acting head of state, is furious. He has made veiled references to Germany's Nazi past after Chancellor Angela Merkel threatened to block the country's application to join the Schengen passport-free zone unless it opened up about its secretive banking practices. "Apparently the German administration still does not understand how to deal with countries that understand direct democracy," said the Sandhurst-educated royal.

Is Liechtenstein worried?

Yes. Financial services account for 20% of Liechtenstein's gross domestic product and 14.3% of its employment, so any crackdown on the country's 15 banks is worrying. Low tax rates and a reputation for secrecy have drawn money to the tiny principality, which has over $150bn under management and is home to around 73,000 holding companies, double its population of 35,000. But already, credit-rating agency Standard & Poor's has downgraded LGT from stable to negative because of "risks to the bank's reputation from an investigation by German fiscal authorities".

Aren't there lots of other tax havens?

In 2000, the OECD named and shamed seven countries it considered uncooperative tax havens. Since then, four have signed up to information provision rules that would deter money-laundering and fraud. As yet, Liechtenstein, along with Andorra and Monaco, has not, and remains on the blacklist.

How does the system work?

Liechtenstein is home to 15 banks and around 400 trustees, mostly lawyers, who manage thousands of Stiftungen', or trusts. When you set up one of these obscure vehicles, one of these trustees is appointed to manage your investments. In turn, you can remain anonymous, meaning the tax authorities in your home country have no idea that you have money stashed away abroad. Robert Maxwell and several African despots have all made liberal use of these services in the past.

What's so bad about that?

This lucrative business has earned the small state the rank of fourth-richest per head in the world, according to the World Bank, and the ire of tax authorities worldwide. "Excessive bank secrecy rules and a failure to exchange information on foreign tax evaders are relics of a different time and have no role to play in relations between democratic societies," Angel Gurria, the OECD's secretary general, said last week.

Liechtenstein's authorities take a different view, however. Tax evasion is not a criminal offense in the Alpine state. Indeed, the country's ambassador to Germany, Prinz von und zu Liechtenstein, recently described tax evasion as no worse than a breach of the traffic rules, in an interview with Der Spiegel. As far as cooperation with other governments goes, Liechtenstein has signed a mutual legal assistance treaty with the United States, designed to fight money laundering and terrorism. However, the agreement does not cover tax evasion, making it extremely difficult to get any information from the jurisdiction.

Do only German tax dodgers use Liechtenstein?

Not at all. Only about 750 of the names on Kieber's list are believed to be German, the rest come from a host of countries, including Britain. HM Revenue and Customs has paid the BND £100,000 for the list, and says it will be able to recoup £100m in unpaid taxes. Authorities in Sweden, France, Canada, Australia and the US are launching investigations too, adding pressure on the tiny state to be more open. More importantly, this is being seen as an attempt to pressure other countries with varying levels of banking confidentiality, such as Luxembourg and Austria, to amend their own secrecy laws. Liechtenstein won't be the last tax haven to feel the squeeze.

Who is Heinrich Kieber?

Reported to be 50 years of age, Kieber is now believed to be living in Australia under an assumed identity, provided for by the BND. Although the world's tax authorities now laud him, the computer expert has a rather dubious past. In 1996 he was involved in a Spanish property deal, which he financed with uncovered cheques. Several years later, when working for LGT, the Spanish authorities caught up with him, and in 2001 he was fined 600,000 Swiss francs for fraud.

Now working for LGT in the Liechtenstein, he had access to all records of the bank's trusts, "because he was digitising its paper archives", Der Spiegel reported. He stole these, and copied them to four CDs, which he hoped to use to blackmail the Liechtenstein legal authorities, ostensibly because of the fine for fraud. His attempts came to nothing, and the bank believed the data destroyed when he returned it to them. But Kieber had made copies and in 2006 he began making contacts with British and German authorities under a false, female name, by email.