German government offers $7.3 million to Liechtenstein informant to
get information on rich German tax evaders, information that was
obtained illegally, and in violation of European data privacy laws.
This was bound to happen sometime. It shows that governments will
encourage breaking the laws of other countries if they can get money
out of it.

RL

http://www.iht.com/bin/printfriendly.php?id=10126351

Germany to rich tax cheats: We've found you
By Carter Dougherty and Mark Landler
Sunday, February 17, 2008

FRANKFURT: The taxman has turned the unusually sunny winter in Germany
this year into a time of high anxiety for its political and industrial
elites. And his work has barely begun.

A fast-spreading scandal has toppled one of the country's most
prominent executives, the head of the postal service, Klaus Zumwinkel,
and shined an unflattering light on what was long an open secret among
wealthy Germans - that dodging the country's high personal income
taxes is a sport they play gleefully. A favorite destination for their
money is

Liechtenstein, the tiny principality at Germany's doorstep known for
its Alpine scenery and discreet banks.

After an opening phase that bore all the hallmarks of a thriller
novel, with payoffs to a mysterious informant who gave German spies a
computer disc with incriminating banking data, a tax evasion
investigation went nationwide over the weekend. Prosecutors are now
nearly certain that they can obtain convictions of hundreds of wealthy
tax cheats and blow the lid off of Liechtenstein's role in the scams.

The bombshell over the massive tax evasion investigation has outraged
Germans and has amplified skepticism about business-friendly economic
reforms advocated by Chancellor Angela Merkel.

Indeed, evidence that Germany's moneyed big shots hid their cash in
Liechtenstein is giving rise to a new narrative in German politics:
the betrayal of the elites, who have spent much of the past decade
calling for painful reform of the welfare state, even as they avoided
paying their fair share.

"The political implications of this are going to be great," said John
Kornblum, a former American ambassador to Germany who is a banker
here. "In the U.S., we send people off to prison and say, 'good
riddance,' but it doesn't actually shake people's belief in the
system. Here, it does."

Merkel, a conservative from the Christian Democratic Union, has sought
to steer her government through mounting criticism that her policies
have bred inequality by moving to the left after years of advocating
painful cutbacks to the welfare system. She has criticized high
executive pay and helped steer through a minimum wage for the postal
service, a measure whose strongest advocate, ironically enough, was
Zumwinkel.

On Friday, Merkel left no doubt where she stood on the matter, calling
the resignation of Zumwinkel, chief executive of Deutsche Post,
"unavoidable." He stepped down the same day.

The jury is still out on how the scandal will unfold politically. Just
two weeks ago, the Left Party, an amalgam of former East German and
radical Westerners that sharply criticizes the unchecked power of big
business, made a strong showing in two state elections. Next week,
German voters in the city-state of Hamburg go to the polls, and
conservatives fear a blowout if the public seizes on it as a chance to
vent frustrations about tax evasion and what it seems to symbolize.
Hamburg could end up as another victory for the left.

Attempting to cauterize the damage themselves, a few German business
leaders ventured their own harsh words for tax evasion over the
weekend.

"Not only family entrepreneurs but also the overwhelming majority of
business executives is rightly worried in light of the damage that is
being inflicted on the entire profession by the misbehavior of a small
group," Ludwig Georg Braun, the head of the German Chamber of Industry
and Commerce, a broad-based business lobby group, said in an open
letter.

German prosecutors began unraveling the scandal in 2006, when a person
whose identity has not been revealed approached the Germany Federal
Intelligence Service with an offer of a CD-ROM full of data on German
clients of a bank in Liechtenstein. After sampling some of the data,
the German finance minister, Peer Steinbrück, last year authorized a
payment of about €5 million, or $7.3 million, to the informant in
exchange for the information, which was then passed on to tax
enforcers.

Steinbrück handed the matter over to the German spy agency after
authorizing the informant's payment from the federal treasury, largely
to keep the circle of people with knowledge of the investigation small
to minimize leaks. Tax collection is a matter for the states in
Germany.

"He was informed over the budgetary implications," said Torsten Albig,
Steinbrück's spokesman, referring to Steinbrück. "The rest is not the
federal government's responsibility."

By late last year, the incriminating material had passed through the
hands of the tax agency in North Rhine-Westphalia, in Germany's
northwest, German officials said, and to the desks of special
financial crimes prosecutors in Bochum, a gritty industrial town.
There, investigators began to recognize in sharp relief the tax dodge
they knew existed, but could seldom document.

The German Tax Union, an advocacy group, estimates that the government
loses €30 billion a year to tax evasion.

Efforts by the former chancellor, Gerhard Schröder, to lure tax-
evading Germans back to the fold with a 15-month tax amnesty in
mid-2005 brought in only a fifth of the €5 billion that the finance
ministry had hoped for when it took the controversial step.

Much of that tax is hidden in the tiny realm of Liechtenstein, where
banks grant favorable treatment to foundations that are filled with
cash spirited out of Germany through various
means - some as simple as filling a suitcase with cash and driving
across the border. (Smugglers are caught regularly.) Foundations are
taxed there at a rate in the low single digits, and allowed to
disburse money to their founders, and to founders' family members.

Most importantly, Liechtenstein offers a hard shell of anonymity to
protect its banking clients. A foundation created by a German tax
evader also creates bank accounts in its own name outside of the
principality, allowing owners access to their cash abroad. Any attempt
to trace their owners runs up against tough banking secrecy laws.

Data from LGT Group, a Liechtenstein bank that has a subsidiary that
specializes in foundations, may have formed the core of the German
investigation. The bank, which is owned by the royal family of
Liechtenstein, said Friday that the German scandal could be linked to
data stolen by a disgruntled employee in 2002, and conceded it was not
sure how many clients had been exposed.

"The scope of the presumed data transfer cannot be determined," LGT
said in a statement.

In Bochum, prosecutors had enough information to obtain 13 search
warrants against three people, one of whom was Zumwinkel. With
television cameras in tow, they arrived at his villa in a posh suburb
of Cologne on Thursday morning and carted away boxes of documents.

They also advertised the fact that they had obtained an arrest warrant
against Zumwinkel, but did not execute it after he agreed to cooperate
with them and posted a large bond. The German magazine Focus and the
tabloid Bild am Sonntag reported that the warrant outlined the classic
Liechtenstein tax scam: a foundation with the mailing address of
Zumwinkel's vacation villa in Italy, filled with €12 million that
Zumwinkel obtained by selling 10 inherited businesses.

So confident were the Bochum prosecutors that they announced they had
evidence against "several hundred" other German tax evaders.

Steinbrück urged tax cheats to turn themselves in and avoid jail time.

"The authorities are telling people even destroying documents will do
them no good," said Rudolf Schwenger, a former tax investigator in
Frankfurt. "The best they can do is turn themselves in and get away
with only a financial penalty."

Still, German prosecutors are staying in motion, not content to let
the sheer angst of the wealthy do their job for them.

"We have a lot of cases to work on here," the prosecutor said. "We're
not going to say when we are going to get to searches."

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