Banking secrecy may be eroded, but tax scams remain

Finance ministers from 52 countries appeared to strike a major blow in the battle against global tax evasion in Berlin during the week. The tax deal signed by countries such as Germany, the UK and France also included major tax havens such as Liechtenstein, Switzerland and the British Virgin Islands.

The idea is that the deal will force governments to collect and exchange information on taxpayers’ assets and income outside their home country.

It has been heralded as the end of bank secrecy. But will it work? The deal appears to be a major breakthrough in catching people stupid enough to hide money in a foreign bank account in their own name. It appears as if there are quite a few of them out there.

However, the guys with the really big bucks will escape because they have been stashing money for decades in opaque discretionary trusts which make it nearly impossible to find out who owns what.

In Ireland we are no strangers to tax evasion. At home tens of thousands of people set up bogus non-resident bank accounts in the 1980s. It was based on collusion with banks in the pretence that they weren’t really living in Ireland, even though some of them were farmers who lived down the road from their bank branch all their lives.

Then we had Ansbacher, followed by the NIB Clerical Medical accounts scam. This was a sort of poorer man’s Ansbacher. Hundreds of millions was also held by Irish citizens in deposits in places like the Isle of Man, which prompted two tax amnesties and a special scheme to bring it home.

Then there was the Liechtenstein discretionary trust scheme, uncovered in the late 1990s by RTE. This was the Rolls-Royce of tax-evasion schemes, uncovered in the late 1990s by RTE – and it could still work today.

It is only when you understand how complex, opaque and mobile some international trust schemes can be, that you see how virtually futile the battle by international tax authorities can be.

Remember how the Irish Bank Resolution Corporation spent tens of millions of euro in consultancy and legal fees trying to establish the ownership and whereabouts of certain property assets formerly owned by Sean Quinn’s family?

The search led to a series of trusts and shelf companies in Panama, Cyprus, Russia and Belize, only to find the man who declared himself as the beneficial owner was a railway worker from the Ukraine.

With a discretionary trust, money or assets can be transferred to a trust and managed by a foreign trustee in Switzerland or Singapore. Officially, it is down to his discretion as to where the money goes and to whom it benefits. The owner is the trust and the trustee decides.

In reality, when used to evade tax, the originator of the funds has a secret deal with the trustee in which the trustee will take instructions, often verbal ones, on what to do with the money. He might direct that a holiday home be bought in Monaco, etc.

This makes it virtually impossible to establish legal ownership of the assets. It is also based on the principle of trust – namely, that the trustee will not use the money to buy a holiday home for himself. But the best scams do rely on a certain honour among thieves.

With technology and global banking, hiding hot money often involves several countries.

For example, let’s say Michael is an American businessman. He sets up a shell company in the British Virgin Islands (BVI). The BVI company opens a bank account in Singapore. Michael also has a US company that buys consultancy services from the BVI company at an inflated rate. This money ends up in the Singapore bank account in the name of the BVI company. It is used to invest in all kinds of stocks, bonds and investment funds managed from Singapore.

A general information exchange between tax authorities will do nothing to catch this guy out. It would take a massive international tax investigation and that would still be difficult.

The new breakthrough deal will definitely hit simple deposits held in beneficiaries’ names.

It follows a number of high-profile tax cases that pushed this process along. Tax investigations into Barcelona footballer Lionel Messi by Spanish authorities at a time when Spain was in economic crisis, was one. A former Liechtenstein banker sold a secret list of bank account holders to tax authorities around Europe, including Germany.

A leaked tape recording of a conversation between a French multi-millionaire and her financial adviser, discussing whether to move €130m out of Switzerland because of new bank disclosure laws, caused outrage in France. Then the US ended up fining Credit Suisse $2.6bn for helping Americans to evade tax.

According to Gabriel Zucman of the London School of Economics, 8pc of the global financial wealth of households is held in tax havens, equal to about $7.6 trillion at the end of 2013. The amount of wealth held by foreigners in Switzerland is $2.4 trillion. In Luxembourg it’s $370bn. In Switzerland, about 80pc of the wealth held by Europeans seems to be evading taxes, according to Zucman’s interpretation of data from the Swiss tax authorities.

The new deal looks like going further than previous agreements, where authorities could only ask for specific banking information about a person based on their suspicions. Automatic information exchange would allow for fishing expeditions by authorities.

Zucman’s research found that once a disclosure agreement was signed with one tax haven, a chunk of deposits tended to move to another haven. Despite a wave of treaties being signed between 2009 and 2010, total deposits in tax havens around the world remained stable at around $2.7 trillion, says Zucman.

Banks in Jersey lost around 4pc of their 2007 tax haven deposits, while Hong Kong gained around 2.5pc.

“Crucially, the deposit gains and losses correlate strongly with the number of treaties signed by each haven,” Zucman wrote earlier this year.

For example, Cyprus signed two treaties and deposits rose by 60pc, while Guernsey signed 19 compliance treaties and deposits fell by 15pc.

Moderately wealthy people with deposits offshore are probably in trouble. They may have to keep shifting them to ever-more risky locations to dodge the taxman. But those who can afford to use international wealth managers who specialise in offshore shelf companies and discretionary trusts, will stay ahead of the authorities.

Offshore assets worldwide are rising, but the number of clients is falling. Advisers are now focusing on the wealthy elite with more than $50m.

According to Zucman, the share of US wealth held by the top 0.1pc – those with more than $20m in net wealth – was 8pc in 1980, but is now 22pc.

The top 0.01pc in the US (worth more than $100m each) accounted for 3pc of US wealth in 1980. The figure is now 11pc.

Things just got tougher for the plebs dodging tax – but the future looks bright for the advisers handling the really big bucks.