– How a suspicion of money laundering arises in cross-border asset transfers –
For decades, German tax evaders have faced the problem that they cannot simply transfer undeclared (“black”) money from abroad into Germany. Any competent tax auditor will perform a cash-flow analysis and then try to trace the origin of an unexpected increase in wealth. Journalists and news magazines invest at least as much effort in uncovering the background whenever a public figure has fallen under suspicion.
Anyone who once appears on the radar has, as a rule, missed the window for a timely, penalty-exempt voluntary tax disclosure. This disclosure remains, incidentally, the only lawful route back to tax compliance in such cases – even though the odd bank(st)er has desperately tried to present clients with thoroughly unlawful alternatives. For an evasion amount of EUR 1 million or more, the BGH (Federal Court of Justice) held in its ruling of 07.02.2012 (Case No. 1 StR 525/11) that a custodial sentence without probation is the rule.
Only in 2013 will a tax treaty enter into force – initially with Switzerland alone – legalising all past tax evasion by means of an anonymous retroactive withholding tax while preserving bank-client confidentiality. Even then, however, for a sizeable share of those affected a genuine voluntary disclosure may prove considerably more advantageous in economic terms.
The Federal Court of Justice draws a line: the local court must grant the press access to the land register
In December 2010, the Burgwedel District Court – Land Registry – refused inspection of the land register and the associated files concerning a property “owned by a well-known politician and his wife”. The BGH (Federal Court of Justice) affirmed the press’s right to information in its judgment of 17.08.2011 (Case No. V ZB 47/11): the request for inspection – based on the contents of the land register – need not already be substantiated by published information; furthermore, where the suspicion proves correct, it must be expected that the information will be used in a manner suitable for publication. The owners’ right to “informational self-determination” and privacy takes second place to the information interest of the media and the interested public – all the more so the more prominently a person stands in the public eye through their office. In this respect celebrities are particularly exposed to the risk of being unmasked by the press – and it need not even involve stolen data, as in the case of a former Postbank chief.
The all-too-favourable loan from Switzerland – entirely without the usual loan collateral
Numerous medium-sized companies, some industrialists, but also celebrities hold bank accounts, for example in Switzerland or other financial centres that waive the withholding tax on investment income for German residents. The money stems not only from businesses making direct payments to Switzerland, but also from inheritances – in some families tax evasion has been a tradition for generations. To regain access to the hidden assets, a popular trick is to enlist a “good friend” or a compliant foreign trustee.
The trustee, for instance, receives the (undeclared) securities deposit as collateral and then lends the entrepreneur his own money back to him across the border in the form of a comparatively low-interest loan. The “tax trick” is that loans do not, in the first instance, trigger income tax. A gift of undeclared money can likewise be disguised in this way.
The heirs of such entrepreneurs, however, then face an even greater problem, because clearing the matter up is rather more costly – especially if the all-too-naïve trustee, under pressure, ends up contemplating or carrying out suicide.
Equally popular here are life insurance policies on several family members that mature only when the last of them reaches the age of 100 or dies. The desired capital, together with accrued interest, can then be drawn at any time – which would not be possible on surrender – tax-free as an ordinary so-called policy loan up to the amount of the surrender value, but only for very nearly the same interest that flows annually to the life insurance capital.
Why bother with a costly trustee or a detour through life insurance when one has good friends? The good friend simply needs some cash for a while. One can then hand the money over as a “low-interest or interest-free” loan – with the difficulty, however, that the origin of the money must be concealed. Later, when the good friend repays the money, it will then be “laundered”, or so the naïve tax evader imagines. He has no idea that, in criminal-law terms, this process has improved nothing, and that the house and, later, the repayment of the loan are likely to remain “assets tainted by money laundering”.
Typical ways of disguising cross-border asset transfers
Employees of foreign banks still carry money to or from the homeland, for example across “green borders” – others use a rail connection that customs officers and other insiders call the “black-money express”. It seems even safer where the foreign bank is known for its good contacts with the mafia and maintains an “external cash box with cash reserves” in the middle of Germany. Of course, this also calls for respectably dressed bank advisers posing as cash couriers. The risk of detection is high, because such cash movements likewise generate receipts or settlement records.
A more convenient model is to use the collective account “Conto pro Diverse” (CpD) of a domestic bank – for example where one has no account of one’s own there, or merely a safe-deposit box. Such domestic banks are then partners of a bank abroad, for example in Switzerland; the cross-border flow of money is settled only internally between the two banks. This flow of funds also works between parent and subsidiary banks, and of course in both directions. For smaller sums, a simple withdrawal from the CpD is the best option. For larger amounts, the customer prefers to buy a cheque certified by the LZB (a branch of the Deutsche Bundesbank) and procured through the domestic bank, because at first no one can see which credit institutions were involved in the money transactions with which bank customers. Such bank-certified cheques are also used, for instance, as a deposit before bidding at real-estate auctions.
Alternatively, one can buy traveller’s cheques from one’s bank at home or abroad, or use Western Union’s “cash transfer service”. In any event this is far more discreet than loading one’s own credit cards in one country and emptying them in another. In the past it was popular to use a postal savings account to withdraw cash from a foreign post office for smaller amounts. Today the collection or cash-on-delivery service of some carriers is more significant when it comes to seemingly discreet money transfers without directly identifiable remittances.
One can also use the “Hawala system”, which exists (almost) everywhere around the globe alongside conventional banking. These are typically reputable financial agents who receive cash in one country and pay it out to the recipient through a partner in another. The internet has added special payment systems such as PayPal, precious-metal clearing accounts, Second Life with its Linden Dollar, and online casinos. None of this can be carried out without leaving a trace, and truly discreetly.
Detection risk and the celebrity bonus
Germany levies federal taxes but leaves their enforcement to the individual states. Tax competition among the states is said to be the reason why the few tax investigators always seem to be overworked. It is therefore unsurprising that probably more than 90% of the cases landing on the examiners’ desks arrive “by denunciation” – because partners have separated or are divorcing, because envious competitors or co-workers spill the beans, or because a foreign bank reports its own formerly badly advised, and ever since intensely irritating, client to the tax authorities.
In some federal states it is customary for celebrities to turn to a political party they trust when a tax audit begins, whereupon the tax auditor is instructed “from the very top” to investigate in the taxpayer’s favour as well. The result then often shows that good friends can indeed work true miracles – and not only where cheap construction finance is concerned.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
