Liechtenstein Scandal


7. Tax havens create a private world of secrecy, impunity and power for rich elites

For example

… the Alpine ‘offshore’ microstate of Liechtenstein, which was already on an OECD blacklist of the three worst offending tax havens[1] when it hit the headlines in early 2008 for harbouring the corrupt funds of hundreds of tax evaders.[2]

The dirty details

German secret services, a CD detailing extensive criminal activity, a lowly IT worker-turned-whistle-blower and a corrupt Prince – ‘His Serene Highness’ – whose powers resemble something more akin to those of a dictator.[3]

It’s like one of the Grimms’ Fairy Tales, an episode of mobster-centric T.V. drama The Sopranos and a John le Carré novel all rolled into one… except it’s all true and goes by the name of The Liechtenstein Scandal.

The order of events went as follows: German secret services paid for a CD of illegally-obtained data identifying hundreds of tax evaders,[4] sparking off a string of investigations into numerous secretive Liechtenstein foundations that were vehicles for tax evasion.[5]

By mid-February 2008, homes of the rich and famous were being raided,[6] high profile CEOs were being fired,[7] and Germany was up in arms that the super-rich minority had been taking such repulsive liberties.[8] At this point, tax haven enthusiasts crawled out of their dank holes and made a shameful defence of the dodgy practices that had been taking place.[9]

Liechtenstein’s ambassador to Germany then gave a T.V. interview,[10] shooting himself in the metaphorical foot. Twice. Firstly, although keen to point out that tax evasion is not legal in Liechtenstein, he then essentially decriminalised the whole matter by pointing out that such evasion is dealt with very lightly chez lui: “When somebody evades taxes here it’s as though you breach the traffic rules.”[11] (Was that meant to reassure?) Secondly – and more importantly – he missed the point. The non-residents stashing their cash in Liechtenstein were benefiting from doing so because they were just that, non-residents. So Liechtenstein’s (domestic) treatment of (domestic) evaders, paltry or otherwise, was neither here nor there. It was in Germany and other states that the tax evasion was originating and it was in those jurisdictions that the penalties would be meted out.

And so to the Prince, since it wouldn’t be a proper fairy tale without a Prince. In this saga, however, he’s not quite the Prince Charming you might hope to find clutching a glass slipper amidst your rags and dust cloths. Indeed, the only thing Prince Hans-Adam II seems to cling on to with anything like passion is the Liechtenstein Global Trust[12] (LGT), which recorded group profits of almost US$ 90 million in 2011.[13] As part of the 2008 scandal’s scrutiny, investigators assessed over 15,000 LGT clients with funds of approximately US$ 155-175 billion invested through 4,000 foundations and other anonymity-providing entities.[14] And here we have reached what is officially known as ‘the nitty-gritty’ of the matter; Liechtenstein’s low tax rate to non-residents is of course important but it’s the secrecy of the foundation (and other artificial entities) that is essential if the exploitation of the tax haven is to take place.

Charming? Not at all.

Solutions

Measures need to be taken to remove the walls of secrecy that encourage and enable dictators and wealthy tax evaders from hiding their ill-gotten gains offshore. Offshore companies, offshore trusts and foundations, and similar legal entities, must be properly registered on public record, and must disclose the identities of every person who benefits from them.

It is time for the OECD’s useless system to be consigned to the scrap heap, and for automatic information exchange to be rolled out across the world. Tax havens must sign up, or be hit with defensive countermeasures. Developing countries – and rich ones – must get the information they need to tax their wealthiest citizens properly.

Key statistic

The cross-border flow of the global proceeds from tax evasion, corruption and criminal activities totals an estimated US$ 1-1.6 trillion per year. Every US$ 100 million recovered could fund full immunisations for four million children or provide water connections for 250,000 households.[15]

The final word

From Richard Murphy, Tax Research UK[16]:

The structure created by Liechtenstein was designed to steal the economic resources belonging to another state. Most war is undertaken to control economic resources. I really see no real difference between physical war and what Liechtenstein is doing. And this is what all secrecy jurisdictions do. It’s not an accident. It is their intent.

References

[1] http://www.oecd.org/document/57/0,3746,en_2649_33745_30578809_1_1_1_1,00.html [accessed 17/11/11]
[2] http://www.taxjustice.net/cms/upload/pdf/TJF_4-1_Doha.pdf [accessed 17/11/11] p.12
[3] http://taxjustice.blogspot.com/2008/02/liechtenstein-emerging-scandal.html [accessed 17/11/11]
[4] http://www.ft.com/cms/s/0/12cb4022-de4e-11dc-9de3-0000779fd2ac.html#axzz1dxWYJKVp [accessed 17/11/11]
[5] http://www.taxjustice.net/cms/upload/pdf/TJF_4-1_Doha.pdf [accessed 17/11/11] p.12
[6] http://www.taxjustice.net/cms/upload/pdf/TJF_4-1_Doha.pdf [accessed 17/11/11] p.12
[7] http://www.ft.com/cms/s/0/12cb4022-de4e-11dc-9de3-0000779fd2ac.html#axzz1dxWYJKVp [accessed 17/11/11]
[8] http://www.taxjustice.net/cms/upload/pdf/TJF_4-1_Doha.pdf [accessed 17/11/11] p.12
[9] http://www.taxjustice.net/cms/upload/pdf/TJF_4-1_Doha.pdf [accessed 17/11/11] p.12
[10] http://www.taxresearch.org.uk/Blog/2008/02/18/liechtenstien-tax-evasion-is-like-a-motoring-offence/ [accessed 17/11/11]
[11] http://taxjustice.blogspot.com/2008/02/does-germanys-finance-ministry-care.html [accessed 17/11/11]
[12] http://www.lgt.com/en/wir_ueber_uns/lgt_portrait/organisation/index.html?DSCext.nav_type=3 [accessed 17/11/11]
[13] http://www.lgt.com/_news/attachments/110829_Media_release_LGT_Group_posts_solid_six-month_profits_of_CHF_82_million_en.pdf?DSCext.nav_type=3 [accessed 17/11/11]
[14] http://www.ft.com/cms/s/0/ee18efc6-5784-11dd-916c-000077b07658.html#axzz1dxWYJKVp [accessed 17/11/11]
[15] http://www.unodc.org/unodc/en/press/releases/2007-09-17.html [accessed 17/11/11]
[16] http://www.taxresearch.org.uk/Blog/2008/02/18/liechtenstein-why-it-was-ethical-for-geremany-to-pay-for-data-to-break-its-banking-secrecy/ [accessed 17/11/11]