Blackboard papers guarantee tax exemption – or tax evasion-deluxe until the end of 2016

– Which loopholes the legislator still allows the investor tax-free –

For decades it has been customary for many investors to store their securities in effective certificates in a safe deposit box. For the older generation, the reason is a war experience, so that, if necessary, one can pick up bonds and shares at any time and carry them in one’s suitcase – for example, for emigration by train to Theresienstadt or by ship to Canada. In Germany, such paper will lose tradability at the end of 2016, when these securities will be declared invalid by law. The legislator forces investors to deposit their assets in a securities account with collective custody via § 358 of the German Investment Companies Act (KAGB). Luxembourg has also created a similar scheme. However, there are alternative possibilities – especially via foreign countries.

Solutions from Liechtenstein or Delaware

However, such securities can also be placed in one or, for better trading, several Liechtenstein life insurance coats, in which case they belong to the insurer (VR) and one only owns them through the insurance contract. Subsequently, the insurance policies can be sold to other private investors on the secondary endowment policy market like a blackboard without the BoD having to find out about it. Anyone can then withdraw the income completely tax-free, even via policy loans, which is absolutely legal in terms of taxation.

Intermediaries or credit institutions can also buy fund units via LV Coatings and then sell the LV Coatings as a kind of blackboard paper. You are also welcome to send it to a Delaware shell company where the foreign earnings are tax-free.

Models for such constructions are proven constructions for completely legal tax avoidance, for example by transferring Spanish real estate to letterbox companies in order to avoid taxes when selling real estate – only one letterbox company is then offered and transferred. This has a decade-long tradition in the EU, both domestically and abroad, in which oligarchs and mafia members still hold their real estate via letterbox companies, sometimes completely legally for tax purposes. Such arrangements are usually made by bank advisors, today, for example, by Arab or Russian customers – because Americans have been a taboo for some years now, so that their tax-neutral money migrated to local tax havens.

Financial and investment advisors as intermediaries without the necessary licence?

Experts call the life insurance jacket an “insurance wrapper”. While the brokerage of a new LV-wrapper, for example from Liechtenstein or Bermuda, is regulated, with reports to the German tax office, either by the broker, or the board of directors – there is no obligation to report and also no licensing requirement for the trade with such “used” policies. At best, this policy is just one day old and made to measure for immediate resale as desired. The trade with used life insurance policies is neither insurance brokerage nor is a used life insurance policy an investment product according to the German Banking Act (KWG).

However, if a third party (e.g. a mailbox company of the broker) concludes a LV-wrapper with a deposit of 1 EUR and e.g. any later additional payments of the buyer of the policy, or e.g. with 10,000 EUR already paid in unit-linked, then he can sell this wrapper unregulated, as used, just as if he would sell his used Hilti – manufactured in Liechtenstein -, he therefore does not need a license as an insurance broker or financial intermediary.

He hands over the insurance policy and assigns all rights without the BoD knowing. He only tells them, for example, that a trustee is managing it, possibly from the beginning. The insurance policy (VS) can also be designed in Germany by law as a pure bearer paper, so this is even possible as a direct over-the-counter transaction. This is perhaps proof that either the legislator deliberately left open barn doors – or that many an author of laws was overwhelmed with the matter?

Insurance certificate as bearer paper or as legitimation paper?

Savings books are regarded as “qualified identification paper” – a payment by the credit institution to the bearer can – insofar as contractually owed – be made in discharge of debt on behalf of the bank, Section 808 I 1 German Civil Code (BGB). This applies accordingly to the insurance policy pursuant to section 3 of the German Insurance Contract Act (VVG) – here too, the BoD may pay out contractually owed benefits to the holder in full discharge of debt. Such documents also legitimise dismissals.

However, if the bank or insurer has an account holder or UN on file, they could also refuse to pay out the money until it is proven that the claim for payment has been duly transferred by assignment to the person who now presents the passbook or insurance certificate (so-called “rectapaper”). The customers of the financial institutions could waive § 808 BGB for their own safety – which is regularly neglected. However, the opposite can also be contractually agreed – and thus the savings book and life insurance policy becomes “fungible”, i.e. negotiable and tradable – without any notification to the bank and the insurance company. Nobody else knows who the assets belong to and nobody can know whether there is a tax liability in Germany.

Letterbox company – also from the EU – from 300 US dollars for everyone?

This works in the same way as a letterbox company – only with bearer shares – from Cyprus or Panama. Theoretically, the shares can change hands at any time, with or without a transfer of ownership – even retroactively, depending on how the creative evasion consultant presents the situation. A mailbox company, and the perhaps cheaper life insurance coat in your own safe in the basement or rented from the bank can thus be a substitute for over-the-counter transactions for any financial investments in funds etc. at any time in the future.

In the end, “tax optimization” costs a “protection money”, payable to one of the up to 1,000 law firms at home or abroad, estimated at a little over 300 US dollars p.a. – but apart from that, practically nothing has changed. The effect of § 358 KAGB is at best that lockers are cleared so that others can store gold bars there in the future – or one brings one’s (temporarily own) bearer shares to the letterbox company instead of having to search for them later behind the living room cupboard.

The real problem is how to achieve the goal of protecting your assets from creditors’ access – what is called asset protection. This requires – as in banking and insurance law – complex structures, which the insurance intermediary or bank advisor believes to have mastered. This regularly proves to be pure imposture – as with tax issues. International tax and insurance law is not included in 300 USD.

dragnet investigation by the financial supervisory authority

In addition, banks and insurance companies are subject to financial supervision – the Federal Financial Supervisory Authority (BaFin) can therefore obtain all documents without exception, e.g. on letterbox companies, only to officially check whether the institutions have fulfilled their obligations to prevent money laundering. Although BaFin will not pass on the data obtained directly to the tax office, it will require the institutions to comply with their obligations to report suspicions in each specific case it identifies, otherwise it will demand the dismissal of the board members. In this way, the mediation of a letterbox company by supervised institutions is not concealed.

On the other hand, such a “dragnet investigation” is excluded in the case of lawyers, as well as in the case of the permitted brokerage of second-hand policies without a broker’s licence. Any supervision is a questionable quality criterion here. It should be enough that the insurer of the table paper policy is supervised, because if he does not know the holder of the policy, the supervision does not do any harm.

Tax evasion with blackboard papers without consequences for decades

A jeweller has his business account with a private bank in a big city. Nevertheless, he cashes selected checks from customers at the bank’s cash desk – a service similar to when a church dignitary with blackboard papers passes by. This is posted to a collective account, the Conto-pro-Diverse (CpD). Auditors like to overlook this, because to investigate this would be just as labor-intensive as to search the external money account of the auditors or tax consultants – there is simply not enough time or personnel. The auditor’s career could also reach the “EDEKA” stage (end of career) if one came across illegal party donations or untaxed consulting fees from politicians.

The jeweller disappears from the counter hall, after cashing the cheque with the cash in the morning – in the afternoon he wants to go to his safe to store the policy he has just bought from the insurance company around the corner, in the (now deceptive) hope of the statute of limitations for amounts of 50 TEUR and more of evaded taxes. There are legal regulations – enforcement fails, not only when overzealous investigators are taken out of circulation.

In the past, there were séparées abroad – today the black money fund at home

Wealthy people used to travel abroad for the exquisite service. Today, bank advisors travel to customers – of course, no longer with encrypted computers in the “black money express” from Zurich to Munich by train. No BKA has ever really cracked the discrete “darknet” of the Internet, where drugs, weapons, human trafficking and black money are dealt with. The professional banker has his access data in his head and can find any computer at the local winegrower’s to dial into the bank or insurance headquarters – abroad. Masses of foreign banks maintain in the country, so it is said – as a service, payout points with cash, for the processing of deposits and withdrawals. Service then also means short distances to the customer. No one in their right mind would transport black money across the border – there are more discreet ways to do so. What is certain is that there is no place that is as safe for the storage of illicit money as domestic financial institutions, i.e. banks and insurance companies. The BaFin, as a supervisory authority, has to be as discreet as any dementia sufferer – and the tax authorities lack the staff.

That is why foreign financial advisors are increasingly recommending domestic financial institutions as predestined to hide money. Germany a tax haven? Those who do not want to rely on it choose geopolitical asset diversification, including abroad.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of

www.kapitalschutz-vertraulich.de (published in Kapitalschutz-vertraulich, strategy paper 20/16 on 29.07.2016)

and

www.experten.de (published on 27.07.2016 under the heading: Table papers: loopholes for investors)

Link: http://www.experten.de/2016/07/27/tafelpapiere-schlupfloecher-fuer-anleger/

and

www.kapitalschutz-vertraulich.de

(published in Kapitalschutz-vertraulich, issue 09/2016, page 2-3 under the heading: Attention! Effective certificates and sheet securities will be declared invalid as of 31.12.2016)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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