over the future of the offshore private banking industry as a much
publicised tax investigation in central Europe balloons into a
major tax havens controversy.
The investigation of Liechtenstein’s LGT bank by BND, the German
intelligence service, which paid a whistle-blower a reputed €4.2
million ($6.3 million) for a list of 1,400 names, has escalated
into an EU-wide probe that has provided unwanted attention for a
host of private banks and jurisdictions.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Initial raids made in Germany last month culminated in a series of
arrests, most notably that of Deutsche Post chief executive Klaus
Zumwinkel. Since then the enquiry has rapidly expanded across the
EU and beyond; 15 other countries including the UK and the US are
investigating the activities of their citizens in the
principality.
Liechtenstein’s banking industry is very different to those now
seen elsewhere in the EU, with few concessions being made to
transparency. The country’s success has been built on a system that
allows non-residents to open anonymous trusts via a trustee or
attorney. Germany has said that its citizens have deposited up to
€200 million in such accounts.
Wider attack
The key question for private banking is the extent to which the
cause célèbre of Liechtenstein will lead a wider attack on offshore
banking and client privacy. The early signs do not look good.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataCriticism of tax evasion and tax avoidance is increasingly a
populist strategy among the world’s senior politicians. German
Chancellor Angela Merkel has been a prominent figure in her
country’s investigation, while UK Prime Minister Gordon Brown has
again advocated a hard-line attitude, in keeping with his
government’s controversial tax clampdown on non-domiciled
residents.
The chorus could grow louder still: a Stop Tax Haven Abuse Act,
introduced to the US Congress in 2007 by Senator Carl Levin, was
co-sponsored by Democratic presidential contender Barack
Obama.
A standoff has emerged between the EU, which sees the LGT affair as
a stick with which to beat other jurisdictions, and nations that
are keen to deny culpability and point to the fact that they,
unlike Liechtenstein, are not designated as “uncooperative tax
havens” by the Organisation for Economic Cooperation and
Development (OECD).
“The threat to offshore banking in the EU cannot be overestimated,”
declares Ted Wilson, an analyst at Scorpio Partnership, a wealth
consultancy.
‘Uncooperative’ countries are next
The emphasis on the importance of terminology has led to attention
being turned to the other two nations labelled as “uncooperative”:
Andorra and Monaco.
Grace Perez-Navarro, deputy director of the OECD’s Centre for Tax
Policies and Administration, is optimistic on Andorra. “They are
going through a major tax reform right now and we have had very
good discussions with them”, she revealed. “But with Monaco it’s
harder to tell. The picture is mixed”. The principality has
protested against its inclusion on the OECD blacklist, but its zero
income tax rate and refusal to disclose financial information are
arousing ire in the current climate.
Private bankers all across Europe remain nervous. In an unwelcome
parallel with the subprime crisis, the concern for banks is that
they do not know who will be the next to be hit. Insiders have
pointed to Monaco, Luxembourg, Austria and Switzerland, and more
raids in Germany are expected after Easter. Among those whose
client accounts have been investigated so far are UBS, Dresdner and
Berenberg; Vontobel is a likely next target.
Switzerland has issued a series of strongly worded denunciations.
Pierre Mirabaud, head of the Swiss Bankers’ Association, has
apologised for comparing the BND’s actions to those of the Gestapo,
but the organisation has reasserted its intention to avoid
compromise on the matter. Monaco sees this inflexibility as
validating its own position; officials there have said they are
willing to work with the EU but only if there is a level playing
field.
With governments continuing to unearth new information by whatever
means possible, the question of whether or not to cooperate could
become moot for worried clients. “This is probably the biggest
international tax evasion scandal that we’ve ever seen,” declares
the OECD’s Perez-Navarro.
Pressure is building for finance ministers to reassess and
potentially widen the EU savings tax directive, set up in 2005 in
an effort to boost transparency.
Perez-Navarro says that “the fundamental objective of the savings
directive was to move to exchange of information”, but clients in
three member countries – Austria, Belgium and Luxembourg – still
have the option of paying a withholding tax rather than declaring
income. Switzerland and Liechtenstein are on board but a
withholding tax that exempts foundations – a favoured set-up in
Liechtenstein – and businesses, and does not apply to capital gains
or dividends, allows for a lot of wiggle room.
Emerging centres keeping their distance
Emerging centres such as Hong Kong and Singapore have not signed up
to the directive in any form. Singapore last year rejected EU calls
to tighten its banking secrecy system (see PBI 230). The Monetary
Authority of Singapore said flatly that the city-state’s
constitution “does not allow us to collect taxes on behalf of a
foreign country”.
German Minister of Finance Peer Steinbrueck has said that proposed
changes to the directive will be unveiled in May. But the nature of
any potential global crackdown remains up for debate.
“EU member states will be calling for swifter action and swifter
implementation of the standards that we have developed,”
Perez-Navarro forecasts. What form this action will take is
unclear, but she suggests that implementing changes to the EU
savings directive will be problematic. “It took a long time to
reach what is an imperfect EU savings directive, so I imagine
getting consensus on any kind of improved directive will take even
longer. Even if the loopholes in the savings directive can be
fixed, there is still some fundamental other capital that wouldn’t
be addressed by these measures. As a result, countries like France,
Germany and the UK are likely to explore avenues outside the EU to
pursue implementation of the OECD standards of transparency and
information exchange by all financial centres.”
Scorpio’s Wilson believes concessions will have to be made, with
banks looking to find a middle ground between safeguarding
reputations and continuing to offer attractive products and
services to high net worth individuals (HNWIs).
A renewed emphasis on onshore services, already clearly visible
among main players such as UBS (see PBI 233), is also materialising
lower down the chain. LGT itself has been at pains to highlight its
intention to look for business in the Middle East, South America
and Singapore this year.
Switzerland may be adopting a confrontational tone but Singapore,
thought increasingly likely to emerge as the affair’s real winner,
has been careful to moderate its response. “We are a low tax
country but not a tax haven. A situation which arose in
Liechtenstein cannot happen here,” said George Yeo, Minister of
Foreign Affairs.
Private bankers had seen 2008 as a year of consolidation in what is
the fastest-growing wealth centre in the world, but Singapore and
Asia as a whole are well placed to capture more assets should the
EU become more inhospitable to HNWIs.
Singapore will definitely come under increased pressure to conform
to EU demands, but is unlikely to cave easily, according to Wilson,
who suggests the city-state “will be able to continue to provide an
offshore service with a reasonable level of confidentiality”.
Last year it was suggested that continued differences in opinion
between Singapore and the EU could jeopardise a potential trade
agreement, but the consultant believes Singapore is “too clever” to
allow itself to become exposed to more serious repercussions.
Instead, he envisages a willingness to comply with a watered-down
version of the savings directive, if only to give the impression of
a bilateral agreement on transparency.
From a nation-state perspective, the desire for harmonised taxation
is seen as a key goal for EU ministers, but the absence of any such
existing legislation has enabled other countries such as Austria,
as with Monaco, to suggest that the EU cannot enforce changes on an
ad hoc basis.
Singapore, free from the influence of hostile neighbours, seems
even better placed.
The weight of public opinion
Nonetheless, analysts believe that the groundswell of public
opinion, which is increasingly framing the debate in terms of
criminality rather than administrative offences, could lead to
private banks weighing up their options.
“One view that Scorpio has is this: if some banks decide to break
from the pack and say they will no longer offer alternative booking
for tax purposes, then they might lose some business but they would
certainly gain in reputation and stature among the moral majority
that pay their taxes,” Wilson says.
Whether the private banking industry believes this is trade-off
worth taking, however, is another matter altogether.
