Banking Secrecy

"Bank Secrecy Bites the Dust in Europe" – Newsweek. "Switzerland, Luxembourg, Austria Loosen Secrecy Rules" – Bloomberg. "Tax Havens Give in to EU Pressure" – Spiegel ONLINE. Has banking secrecy finally come to an end? This is what newspapers seem to be saying. But is it true, or should these headlines be punctuated with a question mark?

The Organization for Economic Cooperation and Development (OECD) wants tax havens to participate in new international tax agreements aimed at creating more transparency. In a set of detailed conditions set out in Article 26 of the OECD Model Tax Convention on Income and Capital, the new ruling creates an obligation for banks and taxing authorities to exchange information, while denying the right to engage in so-called "fishing expeditions."

The change is widely hailed as an important step in the fight against tax evasion and money laundering. Unfortunately, the particulars of Article 26 are easily circumvented with the legal phenomenon of custodial Treuhand accounts.

Once again Switzerland, Austria, Luxembourg, Liechtenstein, and Belgium are in the spotlight for their bank secrecy rules. There have been strong words emanating from the U.S. Justice Department as well as federal tax authorities in Britain, Germany, France, the European Union, the European Commission, and the OECD. In the past, demands from this international community have been ignored and have produced little change to bank secrecy laws; hence today’s headlines.

Of these tax-haven countries, all but Liechtenstein have until recently strongly opposed the current version of Article 26, last updated in July of 2008. In March of this year, however, each has notified the OECD that they are withdrawing their objections. They now believe that bank secrecy is not incompatible with the Article 26 requirements.

Because in truth, acceptance of Article 26 doesn’t cost these tax havens much. With the use of Treuhand accounts with lawyer-trustees protected by attorney-client privilege, the true owners, actors and beneficiaries of financial transactions are successfully hidden from government oversight.

Hidden Treuhand is a customary practice in Austria, Switzerland, Luxembourg, Liechtenstein, and even Germany. With globalization, it has now transcended its national borders to impact industry, commerce, and banking worldwide. It is key in creating shell companies, foundations, and bank accounts where the real owner identity is hidden and cannot be exposed by any legal means. A Treuhand account creates conditions where a lawyer conducts the duties required of him on behalf and in the interest of the client, but all business actions appear to be in the name of the lawyer. The real beneficiary remains unknown. This construct can be applied to corporate stock, foundations, real estate, patent and copyrights, financial instruments such as derivatives and bonds, and of course, cash.

In 2000, some aspects of banking secrecy came to an end. But since then, custodial Treuhand accounts have been frequently used to replace what those transparency laws were supposed to abolish. In essence, this type of account uses verdeckte Treuhand, or hidden trusteeship, which is somewhat like a hidden trust, but legally, it can achieve far more than is generally realized. This type of Treuhand hides the beneficial owner of any asset and can equally be applied to bank accounts, thus hiding profits beyond the reach of tax investigators and governments.

The World Bank estimates that approximately $1.6 trillion flow into tax havens annually, claiming that much of this money comes from developing and transitional economies. Aid sent to third world countries often ends up in Swiss bank accounts, and the Hidden Treuhand is one of the means of disguising the source of these funds. This reported $1.6 trillion does not include corporations with Treuhand accounts, siphoning off millions in taxable income from the economy, redistributing shareholder wealth to insiders, and contributing to the financial crisis and creating inflationary pressures. In Austria, it is estimated that there are more than 3,000 foundations under Treuhand with more than $60 billion in assets.

The phenomenon has not gone unnoticed. In 2007, while President Obama was still a senator, he worked together with Senators Carl Levin and Norm Coleman to introduce the "Stop Tax Haven Abuse Act." Senator Levin claims that "experts estimate that the total loss to the U.S. Treasury from offshore tax evasion alone approaches $100 billion a year, including $40 to $70 billion a year from individuals and another $30 billion from corporations engaging in offshore tax evasion. Abusive tax shelters add tens of billions of dollars more." Senator Levin further states, "offshore tax havens have declared economic war on honest U.S. taxpayers by helping tax cheats hide income and assets that should be taxed in the same way as other Americans."

Preparations to stop tax havens from siphoning off taxable income started before the financial meltdown began to implode banks. But despite the best intentions of the international community, has banking secrecy finally come to an end as some news headlines claim or will lawyers simply move money into Treuhand accounts, corporate shells, and foundations where the identity of the beneficiary can be hidden?

Changes to banking secrecy have come a long way since the day of the anonymous savings accounts. On Jan. 1, 1994 banking laws were amended in response to concerns of money laundering, but provisions were largely voluntary. Before that, one could simply show up at the bank with $10 or $10 million, and put it in an anonymous savings account. No identification required. The bank account was identified by a secret password assigned to the savings book and registered at the bank. To get the money, you only needed to present the savings book and password.

This meant in practice that, unlike in the spy-thrillers, nobody needed to run around with suitcases full of money. One could simply hand over the savings book with the password and the recipient could collect his money at leisure. The new account holder could then change the password for more security, but as long as he had the savings book and the password, the money was safe even from the old owner. Of course, this also meant if the savings book was lost or the password forgotten, no one could access the money.

The password account is much like its Swiss cousin, the numbered account. The concept of the number and the password account originated when Hitler sought to stem the flow of money pouring into safe havens in Switzerland and in Austria. The capital exodus began with inflation, but later with the Nazi persecution of Jews, it was feared that Hitler would try to force the Swiss to reveal Jewish accounts. By giving out numbers, the Swiss bank could claim not to know to whom the account belonged. In Switzerland, the numbered account protected the bank. In Austria, the practice became passwords.

In 1995, Austria joined the European Union, and voluntary provisions became law.  By Nov. 1, 2000, anonymous accounts could no longer be opened and no payments or withdrawals could be made to existing ones unless the bank identified the holder. At the same time, money laundering was finally rendered a criminal offence. Tax evasion on the other hand, the mere concealing of income that did not involve falsifying any documents, remained merely a civil offense, not unlike a traffic violation. In addition, any cash transaction over €15,000 with a customer that didn’t have an ongoing relationship with the bank or was wired to the bank from offshore, needed to register their identity with the bank. With these changes, the European Commission hoped to prevent the financial system from being used to launder money and the Commission withdrew its complaints against the Republic of Austria.

The story of Switzerland and Liechtenstein is slightly rockier. German federal investigators paid €5 million to a former bank employee of the Liechtenstein Große Treuhand bank (LGT). The employee, Heinrich Kieber, is alleged to have removed the secret bank data from the LGT bank, thus kicking off a row over tax evasion in the EU. Before the dust settled, U.S. investigators charged Switzerland’s UBS bank for deliberately encouraging American citizens to engage in tax fraud.

The Swiss have long had a name in banking secrecy, supplying a successful financial business model that attracts an estimated $1.84 trillion in assets of which about €450 billion belong to private customers. The recent heightened notoriety began, however, when UBS bank was found to have offered tax shelters to Americans that had been developed by auditors at KPMG, who managed to avoid criminal prosecution only when they paid up $456 million in fines and penalties. UBS was ordered to pay $780 million.

And then the bank did the unthinkable: They handed over the names of 300 customers for whom the U.S. government produced strong evidence of tax evasion. The U.S. authorities are still seeking the names of an estimated 52,000 Americans with secret UBS accounts.

The mainstream press has described these events as triggering the U.S., British, and German push for an ‘end’ of banking secrecy, prompting bankers from Switzerland, Austria, Luxembourg, and Liechtenstein to hoist their skirts and run for cover. But, given the attributes of Treuhand accounts, the international community may be celebrating an unwarranted victory.

For one thing, tax evasion is not a criminal offense in any of these countries, and barring exceptional circumstances, banking secrecy is legal.

Just how big is the offshore banking industry? The OECD estimates that assets held by the offshore banking industry might be as high as $11.5 trillion. Little wonder U.S. banks are having trouble lending money.

Many large-cap U.S. corporations – such as McDonald’s, who recently moved their headquarters to Switzerland – have headquarters or subsidiaries based in tax havens. Moreover, it is possible for  U.S. hedge fund to own an offshore bank. For example, the highly secretive hedge fund Cerberus, as well being a majority shareholder in Chrysler and GMAC, also purchased BAWAG, an Austrian bank that faced liquidation when it was discovered that the CEO had engaged in dubious offhsore financial transactions, created with foundations and hidden Treuhand, to hide beneficiary identity. If questioned today, would BAWAG executives reveal financial information about stakeholders of Cerberus? No, there would be little need. The financial and legal advantages associated with Treuhand accounts are too hard to resist.

As result of the crackdown against tax havens, many clients wishing to maintain secretive bank accounts will resort to custodial Treuhand accounts and their lawyer-trustees to hide money in shell companies or foundations.

In light of this, shouldn’t those news headlines be punctuated with a question mark?

 

Shelley Stark is the author of Hidden Treuhand: How Corporations and Individuals Hide Assets and Money, published by Universal Publishers, Boca Raton, FL.  Also available through Amazon, Barnes and Noble Bookstores, and the British Bookshop. 

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