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Tax

Germany and Liechtenstein in tax row

Written by Adrie van der Luijt

Wednesday, 20 February 2008

The heir to the throne of Liechtenstein has stepped into a row over accusations that the German tax authorities used bribes to blow the principality’s bank secret.

The chief executive of Deutsche Post, Klaus Zumwinkel, stepped down last week after police interrogated him over an alleged €1 million tax evasion.

The tax authorities have threatened that other high-profile victims will follow within weeks.

Since then Germany and Liechtenstein have become embroiled in a bitter argument over the tax haven’s highly confidential accounts held by wealthy Germans.

Blacklisted

Liechtenstein is a 62 square mile sized principality located in the Alps between Switzerland and Austria. Financial services form the backbone of the country’s economy, alongside the production of false teeth.

At the end of 2006, 15 banks in Liechtenstein administered client assets worth about 160 billion Swiss francs (£75 billion).

The Organisation for Economic Cooperation and Development's (OECD) blacklisted Liechtenstein in 1999 as an uncooperative tax haven, alongside Andorra and Monaco.

The German prosecutor announced that they were investigating tax dodges by hundreds of Germans, worth an estimated €4 billion, involving secret bank accounts in the tiny alpine country.

Private residences, offices and banks across the country have already been raided as part of the ongoing operation.

Sovereignty

In Liechtenstein the hereditary monarch still has real executive power. Prince Hans-Adam II von und zu Liechtenstein is formally still head of state but has handed over his day-to-day activities to Crown Prince Alois.

Prince Alois used a press conference in Vaduz on Tuesday to blast the German tax authorities ahead of a visit by the prime minister of Liechtenstein, Otmar Hasler, to the German Chancellor Angela Merkel on Wednesday.

Hasler told the Financial Times that his country had made great efforts to bring to justice criminals who were guilty of money laundering, the financing of terrorist acts and corruption.

The Prince accused the German authorities of threatening the country’s sovereignty by paying an informant up to €4.2 million to provide a stolen CD containing a list of bank accounts at Liechtenstein Global Trust (LGT) bank that subsequently formed the basis for the investigations.

Stolen goods

LGT Group, headed by Prince Max of Liechtenstein, is the wealth and asset management group of the Princely House of Liechtenstein. It has around 1,500 employees in 29 locations in Europe, Asia, the Middle East, and America. As of 30 June 2007, LGT Group's assets under administration totaled CHF 99.7 billion.

"Obviously Germany wants to be a big-time receiver of stolen goods. Germany has clearly failed to understand how one behaves towards a friendly state," the Crown Prince said.

He added that Germany needed to overhaul its own tax system, which he described as the worst in the world, rather than to attack its neighbour.

“There are two kinds of transparency regarding the taxation system: transparency towards the citizens and transparency towards other countries. We are good at the first kind, but as far as the second is concerned we believe that too large a transparency is not in the interest of the citizens," Crown Prince Alois concluded.

Hasler said, "We believe that it is crucial to have an open discussion about whether it is legitimate to aid and abet criminal activities – and the theft of data certainly qualifies as a criminal activity – by using substantial public resources to purchase stolen goods from a thief."

Sanctions

The German finance minister hit back by leaking a document to German newspapers in which he attacked Liechtenstein for facilitating tax evasion.

The minister did not rule out sanctions against Liechtenstein if it failed to provide full transparency on financial transactions involving German citizens.

The German government is believed to be considering a withholding tax on bank transfers to make it harder for tax payers to use tax havens to avoid paying taxes.

Germany's federal intelligence service, the Bundesnachrichtendienst (BND), has admitted paying the bank employee to turn “supergrass” and said it had the full backing of the German government.

Criminal case

LGT Group said security precautions to protect the private sphere of clients had been continually enhanced to conform to the latest technology over the years and that there were no grounds to indicate that client information had been stolen since 2002.

In 2002, confidential client data was stolen from LGT Treuhand AG in Vaduz by an employee at that time. LGT Treuhand AG is a subsidiary of LGT Group independent of LGT Bank, which is responsible among other things for setting up foundations.

The theft was immediately reported as a criminal case and the employee, who in the meantime had left the company, was sentenced by a court at the end of 2003.

Based on contacts between the parties, the data material was supposedly returned in full. Accordingly, on the basis of the facts at that time, LGT Treuhand AG regarded the case as closed.

Legal action

LGT Treuhand AG first became aware in the summer of 2007 of isolated indications that client data had been illegally disclosed and initiated an internal investigation to determine the source.

It said that over the last few days signs had become clearer that this involved parts of the data stolen in 2002.

Shares in Liechtenstein banks continued to fall sharply on the Swiss stock market on Wednesday. Standard and Poor's downgraded LGT Bank on Tuesday from 'stable' to 'negative'.

The Liechtenstein government is said to be considering legal action over Germany’s use of tax money to solicit theft of confidential bank data.

Germany's ruling Conservative party faces a key state election this week. Polls show that the government's high-profile handling of tax evasion by the country's business elite is going down a treat with voters.

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