Crusading politicians may posture and pronounce as much as they like. But the rich will always look for — and find — tax havens of one kind or another, says William Cash
I n the weeks before Gordon Brown boldly declared at the G20’s ExCeL Centre in the Docklands that the era of offshore ‘banking secrecy’ was over, the fax machines of the specialist private-client law firms in London that cater for the tax affairs of the super-rich had already been regularly running out of paper overnight as anxious clients — including Mayfair hedge fund managers on holiday in St Moritz, Rich Listers aboard their yachts in the Bahamas and private equity barons at villas in the Maldives — worried whether they should urgently move the millions they have stashed away in such previously ‘safe’ banking countries as Switzerland, Liechtenstein, the Cayman Islands, Monaco and Luxembourg. ‘Our fax machines had to be manned during the night by interns that we paid to sleep in the office,’ I was told by one senior partner of a top specialist tax-and-trust law firm.
‘That’s because we always tell our wealthy clients to never, ever, communicate with us by email on any subject relating to their offshore accounts, as if they are audited we have to hand the emails over. Faxes are much safer and are always destroyed.’
All over London, it seems, as ‘tax havens’ where London’s super-rich have been squirreling away millions away from the prying eyes of global tax authorities — and often wives, families and mistresses — have become the target of political ire, a sense of panic among the rich has set in about whether their offshore money — even if it is in a numbered account — is ‘safe’ any more.
Of course, much of the reason for the anger towards the rich is simply envy. Never before in the history of the world was it so easy for a self-selected club of self-interested financiers to make such vast fortunes out of Other People’s Money for doing so very little indeed.
In the old days the super-rich were an almost exotic tribe of recluses or eccentrics, like John Paul Getty or Howard Hughes. When you read about them you were more likely to feel sorry for them than envious of their lonely and miserable lives.
But at least they built huge corporations and companies, often taking a lifetime to do so, and the price they paid for their labour or genius was often a life of tragedy, pain and unhappiness. However, something changed around fifteen years ago.
We entered the Age of Social Pornography. Suddenly, with the invention of Rich Lists, a new social arms race broke out in the media — and in the world of glossy magazines — in which it was suddenly acceptable for people to talk about their ‘net worth’ and just how much they had stashed away.
A ll very vulgar, of course, but it was the most perfect expression of the new cult of money that has since blown up in our faces. In the Golden Age of Mayfair’s financial boom years, a crazy and morally unhinged remuneration system was invented on Hedge Row that made it possible for young men — very few women seized their chances — to make tens of millions a year, more than their parents made in a lifetime.
In America, seven of the biggest failed financial institutions took home $464 million in pay since 2005 while their businesses racked up $107 billion in losses in two years alone.
According to Andrew Goldstone, head of personal tax at Mishcon de Reya and a leading tax adviser, the world’s super-rich broadly divide into two camps: taxpayers and tax dodgers. Yes, he says, they all want to pay as little tax as possible, but they go about it in very different ways.
Taxpayers use smart lawyers to find entirely legal ways to minimise their global tax burden. Tax dodgers use not-so-smart lawyers simply to hide their money.
‘I don’t think taxpayers will change their views one jot,’ he says. ‘They’ll continue to take good advice, pay tax where it’s due, and use those offshore jurisdictions that understand the way the world is moving. Tax dodgers, on the other hand, have something to worry about.
‘They’ll either decide the game is up and turn into taxpayers or they’ll be frantically running around looking for offshore jurisdictions of questionable repute which most people have never heard of anyway.’
Even before any new rules are passed, Goldstone adds, he expects to see a lot of nervous calls from high-net-worth clients to their private bankers asking about the bank’s current privacy and disclosure policy.
But even if they don’t like the answers they get, the big question is: where do they place the money instead? ‘We may see sudden investment into non-financial assets such as real estate and art, through complex ownership structures designed to obfuscate,’ he adds.
‘For me it’s business as usual. My clients aren’t unduly worried about the G20 announcement — they understand that banking secrecy is no longer the tax evader’s best friend, but that was never a friendship they cultivated anyway.
‘Of course, they want confidentiality. They want tax efficiency, too, but most of all they want to be able to sleep at night. For many, the threat of a tax investigation and the inevitable public scrutiny that goes with it is as scary as a security threat. That’s why our wealthy clients pay their tax: they know it’s the price they have to pay in order to avoid unwelcome attention from global tax authorities.’
B ut if you’re not so keen on paying tax, or rather you see yourself in the bracket of the ‘tax-conscious rich’, where should you be banking offshore today? Where is ‘safe’?
Certainly, places like Panama, Singapore, the Cook Islands, Costa Rica, Malaysia, Cyprus and Uruguay are now opportunistically positioning themselves to take over from the likes of Monaco and Liechtenstein as the new favoured banking centres for the shady rich.
Other options include Macao and Hong Kong — Singapore is now the Zurich of the Far East — which is why China refused to agree to the G20 tax haven blacklist at the G20 (although Singapore, Hong Kong and Macao have ‘promised’ to co-operate by the end of the year). For sure, the super-rich are under siege today like never before.
And they are being specifically targeted now in the one area where they are most terrified of being hit: their offshore bank accounts, where it is estimated that some $7 trillion of assets are held, from Macao to Monaco.
According to the tax pressure group Tax Justice Network, which actively campaigns against so-called uncooperative ‘tax haven’ countries, developed countries such as Britain, France and Germany are losing out on an estimated $180 billion a year in evaded taxes.
After the G20 summit, which introduced a three-tier report card for global offshore financial centres, graded according to a country’s willingness to hand over details of client accounts, Monaco was taken off the blacklist and placed on a ‘grey’ list of countries that have now promised to sign various tax treaties and start co-operating with tax authorities in the future.
Such was the royal zeal with which Monaco was keen to be removed from any post-G20 ‘blacklist’ of tax havens — the current list of non-compliant rogue countries includes the Philippines, Malaysia, Costa Rica and Uruguay — that Prince Albert, Monaco’s ruler, has ordered an investigation into bank accounts held by his country that purport to belong to Third World dictators, including £50 million allegedly belonging to the widow of the late President Bongo of Gabon in the Congo.
By showing that Monaco is prepared to open up its vaults and expose accounts where ‘dirty money’ — whether it was placed on deposit by dictators, oligarchs or money-laundering criminals — is suspected, has sent shock waves through the offshore banking community.
‘If Monaco is changing its spots, then we really are about to see a new attitude towards tax evasion,’ says one London tax-and-trust lawyer. Other countries named on the OECD ‘grey list’ of 30 tax havens that have theoretically committed to opening up accounts but have not yet (crucially) actually implemented such changes include Switzerland, Luxembourg, Bermuda, Belgium and Nauru.
But most startling of all, perhaps, is the appearance on the ‘grey list’ of Liechtenstein, formerly the OECD’s chief blacklisted whipping boy for everything that was shady and sinister about the murky world of hidden assets, tax avoidance and banking secrecy.
Ruled by Prince Hans-Adam II, the richest European monarch, the Alpine tax haven comprises just 62 square miles along the Rhine, sandwiched between Austria and Switzerland. It is also the owner of LGT bank (Liechtenstein Global Trust), which is the largest bank in the country and is today run by Hans-Adam’s second son, the Harvard-educated Prince Max Liechtenstein, who lives in Munich.
For years, Liechtenstein built up an enviable reputation in the offshore banking world for being the Untouchable of banking countries. If you had money stashed away in Liechtenstein — as several thousand British account holders do, with an estimated value of around £3 billion — it was safe. Safe from wives, safe from tax authorities, safe from court orders.
Their bankers (actually more often lawyers) would never disclose your assets to the tax authorities; and they would protect their clients’ privacy as a matter of national honour.
Such loyalty towards its rich clients — which reportedly included a rogues’ gallery of billionaire dictators (including Saddam Hussein), oligarchs and the late Robert Maxwell — helped turn Liechtenstein into one of the world’s wealthiest financial centres and secretive tax havens (looking after approximately £130 billion of other people’s money, treble that in Monaco).
The biggest blow to Liechtenstein’s credibility was the 2007 scandal at the royal LGT bank, which revealed that the German government had paid over €3 million for information relating to the bank account details of LGT bank’s trust division clients. The data had been stolen by Heinrich Kieber, a disgruntled employee who sold the client data to tax authorities across Europe.
In total, Kieber had passed on 1,400 names with accounts totalling 5.5 billion Swiss francs. He also sold information, for £100,000, on 100 bank accounts held by wealthy English families to Her Majesty’s Revenue and Customs. This was expected to result in at least £100 million in fines and recoverable lost taxes.
This crisis became an opportunity for the bank to reinvent itself on the international banking scene as a fast-growing ‘onshore’ bank, and also to assure other nations that it would be reviewing its policy towards non-disclosure.
Far from being the black sheep of the ‘tax haven’ community, the tiny principality is now the poster boy for everything that is changing in the world of secret offshore banking. In the words of one of the UK’s most senior tax officials, Dave Hartnett, who is permanent secretary at the Treasury for tax at HMRC, Liechtenstein is now trying to set the new ‘Gold Standard’.
Under the terms of an eye-opening new tax treaty being currently negotiated between the UK tax authorities and Liechtenstein, HMRC will be offering British account holders the chance to ‘come clean’ about their accounts in return for limited penalties.
A similar ‘amnesty’-style arrangement was introduced by the UK tax authorities in 2007 which encouraged wealthy account owners to reveal their offshore accounts. The deal brought in a very paltry £400 million, partly because most wealthy individuals were advised to say absolutely nothing.
But this new Liechtenstein treaty seems to have much more serious consequences. Unlike the 2007 amnesty deal, Liechtenstein banks would be asked to ‘close down’ accounts of clients who do not go along with the limited amnesty and one of the ‘big four’ accountancy firms would be brought in to ‘verify’ that all undeclared accounts had been struck off the Liechtenstein account rostrum.
The Liechtenstein Bankers Association told me that they did not expect their wealthy UK clients to close down their accounts and move their cash elsewhere as ‘the vast majority’ of other financial-sector countries were now committed to the ‘global standards of transparency and exchange of information’ put forward by the OECD.
When I asked the LBA whether Liechtenstein would remain a country in which banking privacy and banking secrecy were an essential part of the national business model, I was told: ‘Stronger tax cooperation does not contradict banking confidentiality, understood as the protection of clients’ privacy and data from unjustified interventions by third parties.’
The reasons why the rich like to use tax havens are very obvious. First, they are ideal places to ‘hide’ cash; and second, any taxable interest or capital appreciation is likely to be far lower — if any at all — than at home. Monaco — and Dubai — does not levy personal income tax at all; the Cayman Islands does not have capital gains tax (CGT); and the Bahamas does not charge CGT or income and inheritance tax.
Governments, understandably, want this untaxed income to return back onshore. And with the best clients of offshore centres like the Cayman Islands or Liechtenstein being the very bankers and ‘financiers’ who have been widely blamed for the global financial crisis, having greedily creamed off the spoils of the boom years for their own selfish benefit, overpaid themselves, ripped off clients and employed the very best tax lawyers, it was hardly surprising that such financial centres would become the number-one target of governments wanting to bring as much revenue as possible back onshore while also giving a populist bloody nose to those financial ‘villains’ who benefited disproportionately from a largely unregulated system they practically invented for their own club-like benefit.
But is there really any chance of their recouping this money and stamping out banking secrecy as Brown has declared? In reality, they have no more chance of realistically making countries like Switzerland, Singapore and Monaco really change and roll over and hand over all the details of their client bank accounts — with the few exceptions of cases in which they have concrete evidence to suspect tax fraud — than they have of persuading the Swiss to join the euro.
‘So much of what we are seeing is political posturing,’ says one top tax and trust lawyer. ‘The countries have to be seen to look like they are co-operating but you will find that, in reality, not that much is going to change. Yes, criminals will have a tougher time hiding their cash — but Switzerland is not suddenly going to go out of business overnight.’
A good example of these double standards is the tactics of a country like the Cayman Islands, long favoured by the hedgies of Mayfair. They are located in the Caribbean 480 miles south of Miami.
Formerly a British sovereign territory, the Cayman is also the fifth-largest financial center in the world. Forty-five of the world’s top 50 banks have operations, or subsidiaries, in the Cayman Islands.
Over the past twenty years or so, one of the reasons that so many former British crown dependency colonies have been so successful at turning themselves into offshore financial centres is that the rich have liked the fact that the colonies were founded on an understanding of a rule of law.
‘It has given the rich a feeling that their money is safe,’ says Anderson. The hedge-fund management community likes the Cayman Islands because of its relatively relaxed financial regulation — for which can cost a hedge fund (with an anonymous address) no more than around $1,500 a year to sign up.
The problem with the Cayman Islands is that in 2003, the UK signed the EU Taxation Savings Directive, which required European governments to tax the savings income of EU citizens who had accounts in banks outside their home countries.
As a member of the British Commonwealth, Cayman was required to sign the EU directive. This meant that Cayman could no longer effectively compete with offshore financial centres that did not have to comply with the directive, such as Hong Kong, Macao and Singapore.
However, they got around this by getting its governing assembly to agree to abide with the EU Savings Directive ‘only if those measures came into effect at the same time in EU member states and in named third countries and overseas territories’; in other words, do nothing for now.
How long such tactics will continue to work is difficult to say. What is certain is that with HM Revenue and Customs tax officials now out to make life as miserable as possible for the rich, the first thing the rich are doing is arming themselves with the very best lawyers, tax advisers and private bankers.
This threat is certainly being understood by the bankers themselves. Nobody really has a clue about how much money is illegally stashed offshore in countries like Liechtenstein, Monaco and Luxembourg. It’s certainly in the trillions; always has — and always will be.
The truth is that the actual revenue that will be clawed back from the tax information exchange treaties that are currently being called for will make no real difference to the real problems facing economies such as Britain’s.
‘Onshore governments have got to be sensible here. They have to have the right regulation rather than more regulation,’ says James Anderson, editor-in-chief of the Wealthnet, a leading specialist tax and trust resource.
‘The danger is that the money will simply go further underground where there is little or no regulation,’ he adds.
‘The wealthy will start to look at places like the Cook Islands and Cyprus, which is well known for taking money from Eastern Bloc countries and lots of Russian money. There will always be some countries that will take the money and not co-operate.’
It is only right that the banking authorities in countries like Monaco and Switzerland tighten up their laws with regards to sharing information regarding criminal clients, but the real issue that is not being addressed is how an attempt to close down these financial ‘offshore’ centres — including London (where much of the offshore banking is managed, from offices in Mayfair or Canary Wharf) — would be disastrous for the global economy at a time when money needs to flow and when entrepreneurs, businessmen and corporations — from multinational companies to financial services — need to feel they can move money around freely without fear of bank accounts being freezed, inspectors arresting them at airports and corporate or individual assets seized.
And Brown knows that he can’t really afford to alienate the asset managers, private-client bankers and lawyers of London who are now going to be so busy in the next few months. He has already done them a great favour by putting tax avoidance so high up on the agenda.
So what will the rich do? Come clean, or simply move their cash to countries of a shadier nature, which are welcoming the clampdown on tax havens as a new business opportunity. There is a saying in the banking community: ‘Money is like water — it will always find a place of least resistance.’
The irony of this will not be lost on observers. Once Sarkozy is back playing tennis with his billionaire friends and Carla’s celebrity pals, the Swiss and the Monégasque and the Liechtenstein royal family will get back to doing what they do best: subtly bending the rules to look after themselves and their rich clients.
Far from the era of ‘banking secrecy’ being over, it is just about to get a whole lot more fun, expensive and sophisticated. Never has it been a better time to become a tax lawyer.