Scotsman: Paying too high a price to catch the tax dodgers

Questions have been raised over the morality of buying stolen information to identify the holders of Liechtenstein accounts.

By LINDSAY MCINTOSH
TOURISM has long been a flagging industry in Liechtenstein, dropping to such a low in 2003 that the entire principality was offered up for hire to wedding parties and corporations on team-building ventures.
But while most Britons will not have set foot within its boundaries – indeed, some will probably not know it lies between Austria and Switzerland – many do have significant investments hidden in secret accounts within the tax haven.

Secret, that was, until last week, when HM Revenue & Customs (HMRC) bought a list of about 100 investors with one of Liechtenstein's leading banks.

There will now be a group of individuals across Britain concerned about how the information is to be used and what the consequences will be.

The deal, reportedly worth £100,000, was made with Heinrich Kieber, who stole the details from LGT bank and proceeded, to all intents and purposes, to hawk them around governments.

HMRC said that for the meagre outlay – the specifics of which officials will not confirm – they could be able to claw back £100 million in unpaid tax.

According to Ronnie Ludwig, an Edinburgh-based partner in the private-wealth group of Saffery Champness, penalties could be up to double that – plus interest.

He added: "On that level, you can understand why the money was paid.

"On another level, the moral level, this man has committed a crime and benefited from that.

"No-one wants to see a tax evader get away with it, but there's a dilemma over the question of paying someone who has got the information illegally."

Liechtenstein officials, furious at the attack on the prized sanctity of the country's banks, have already started legal proceedings against Kieber, a former computer expert who first sold the information to Germany for £3.2 million.

The betrayal is perhaps compounded by the fact that the bank involved is owned by the Liechtenstein royal family.

Crown Prince Alois claimed his state was coming "under fire from a great power".

Meanwhile, his uncle, Prince Nikolaus, added: "We don't like to be bullied."

However, Peer Steinbrueck, the German finance minister, remains is unrepentant, and has announced his desire to "declare war on tax havens in Europe".

Dozens of high-profile Germans, including the head of the country's post office, a top executive and four politicians, have already been questioned over their accounts.

Mr Steinbrueck is not waging his war alone. The leaked information has now gone global, with the United States, Australia, Italy, France and many other governments handing over cash for details.

Mr Ludwig believes this is the first time the HMRC has participated in such a deal, although it has always been within its powers to do so.

Meanwhile, the Taxpayers' Alliance campaign group is outraged. Despite being keen for those who owe tax to pay it, the group is against using means such as these to catch people who have not.

Matthew Elliott, its chief executive, said: "Buying stolen information is not only wrong, it is questionable whether the data would even be admissible in court.

"HMRC should focus on getting the basics right, rather than paying taxpayers' money to criminals."

Derek Allen, director of taxation at the Institute of Chartered Accountants of Scotland, said the HMRC's failing was the way it handled the distribution of information to the media and general public.

While the department offered an amnesty on offshore accounts last year, allowing holders to pay just a fixed penalty, it has made no specific guarantees in this instance.

Mr Allen added: "They are trying to close the tax gap and, at the end of the day, that's quite a laudable objective.

"But I think if you want to move to the moral high ground, it's actually very, very difficult to say the end justifies the means in circumstances like these.

"I would be much happier if some way had been found for HMRC to persuade the Liechtenstein authorities, and we are dealing with a very small country here, to actually hand over the information."

However, it is unlikely such an approach would have been successful.

Liechtenstein is one of only three tax havens, along with Monaco and Andorra, to fail to sign up to the Organisation for Economic Co-operation and Development (OECD) agreement on disclosure.

The contract was drawn up in the wake of the 11 September terrorist attacks on the United States, when the terrifying possible consequences of money laundering were thrown into sharp relief. As a result, the three nations have been blacklisted by the OECD.

However, by adopting a new, open and honest approach, tax havens have not rendered themselves obsolete.

There are still opportunities for legitimate investors, who have a justifiable reason for sinking their honestly earned funds into an offshore account.

Indeed, a number of the names on the list currently being worked through by the HMRC are no doubt blemish free.

Mr Ludwig said: "They are still tax havens and people can have very legitimate reasons for having banks in those countries, for example they might be non-UK domiciled, who don't require at the moment to declare any income they have generated offshore, provided they don't import it into the UK.

"Or maybe people have a legitimate business over there, or are declaring the interest. There will be some examples on the list."

For those who do not have a legitimate reason for being on the list, those whose collective hearts sank when the news of the security breach was released, the penalties may be steep.

Those caught out could be jailed for a maximum of seven years, if they are convicted of a serious offence – such as producing fraudulent documents – under the Police and Criminal Evidence Act 1984.

However, custodial sentences are still rare in tax fraud.

In 1987, Lester Piggott, the derby-winning jockey, served three years after pleading guilty to serious tax frauds, including sending false statements.

There is also the underlying criminality of where the contents of the accounts came from.

Opening an account in Liechtenstein may demonstrate a desire to avoid paying not only the tax due on interest earned, but the tax to be paid on the initial income.

Mr Allen said: "From HMRC's perspective, there's a substantial risk or probability that these people will be sheltering money that should otherwise be taxed.

"In the UK system, if they are living here, they should be paying tax on their worldwide income.

"We have tough money laundering procedures, so if you have criminal profits, what do you do with them? Park them in a hidden bank account, hide it from the rest of the world."

But, as of last week, the details of a large number of secret accounts in one of Liechtenstein's banks are no longer hidden from the rest of the world.

The dark curtain of secrecy which has lain over the bank's doors have been ripped off by Kieber and his willing customers, and pinning it back up is unlikely to be an option.

The principality with the population of 35,000 – less than the number of companies registered in the Alpine land – may find that its days as a tax haven are numbered.

'Integrity of banking law compromised'

Ronnie Ludwig Partner with accountants Saffery Champness

HEINRICH Kieber has contravened the banking laws and strict code of secrecy in Liechtenstein by removing details of private customer transactions and selling these to foreign tax authorities.

On one level it creates a moral dilemma for the tax authorities who have paid him to hand over the details, but nobody wants to see tax cheats getting away with it.

If looked upon as a return on the £100,000 allegedly paid to Keiber, with the authorities expecting to recover tax of £100 million, plus interest and penalties, it is a complete no-brainer. The return is absolutely enormous.

But on another level, the moral level, this man has committed a crime and benefited from that. No-one wants to see a tax evader get away with it, but there's a dilemma over the question of paying someone who has got the information illegally.

The integrity of banking law has been compromised by one employee who's seen an opportunity and gone for it.

Whether the tax authorities could expect to see a similar thing happening in Andorra or Monaco, we don't know.

This might encourage someone in another bank to think: "I can make a million".

The other thing may be that this will scare people into coming clean. When you see these figures, they suggest that the scale of tax evasion is continuing apparently unabated.

They are symptomatic of tax evasion on a massive scale.

Transparency over tax issues is essential

Dave Hartnett HM Revenue & Customs' acting chairman

TAX evasion is not a victimless crime. Honest citizens have to meet the cost of the tax that is evaded by a minority who are dishonest.

Tax cheats deprive our public services of vital funding.

Everyone is entitled to conduct their financial affairs in privacy, but secrecy laws which facilitate tax evasion are completely unacceptable.

Those who have hidden their income and gains from HM Revenue & Customs should come forward and make a prompt and complete disclosure.

In the light of the recent developments involving Liechtenstein bank accounts, there needs to be a significant move towards the full implementation of the OECD's standards on transparency and effective exchange of information in tax matters.

All the countries now working together were represented at the Forum on Tax Administration's (FTA) September 2006 meeting in Seoul, when tax commissioners from more than 30 countries identified the use of tax-haven bank accounts as a major threat to successful tax administration.

The commissioners will continue to re-examine the effectiveness of the measures in place to protect tax bases and to consider whether new measures might be needed.

At the FTA meeting held earlier thisyear in South Africa, the commissioners agreed to undertake an analysis of the role of banks in tax compliance.

Key words

Organisation for Economic Co-operation and Development (OECD)

International organisation which brings together the governments of countries committed to democracy and the market economy from around the world.

Stiftungs

German term for private interest foundations. They are legal undertakings established to allow tax-planning flexibility.

Classic whistleblower

The source from which the German government initially claimed it had received the details of the account holders at LGT.

A whistleblower is usually a current or former employee or member of an organisation – particularly a business or government agency – who reports misconduct to an outside source with the hope they will take action against it.

Comments

[Benjamin Wright]

Mr. Kieber's actions are a token of the information age. In the age of information, the rich, the powerful and the authoritative surprisingly find that they can keep no secrets. Therefore putative secrets become liabilities. What do you think? --Ben hack-igations.blogspot.com/2007/12/people-in-authority-sometimes-abuse.html