Switzerland | Treasure Hunt

Experts question if a new global initiative to expose offshore wealth does enough

01 August 2014
Rudolf Elmer leaked information on the Swiss bank Julius Bär.
CARL DE SOUZA / AFP / Getty Images

I FIRST MET RUDOLF ELMER in January 2011 in Zurich, on the day he narrowly escaped a prison sentence in a Swiss district court. Elmer, who is 58 years old, was charged in 2010 under Switzerland’s severe banking secrecy laws for leaking data obtained while he worked at the Cayman Islands branch of Julius Bär, a Swiss bank with a presence in numerous offshore tax havens. The information, according to Elmer, included back-up data on nearly two thousand trusts, funds, companies and individuals from around the globe. Elmer shared part of the haul with the whistleblowers’ website WikiLeaks, which published it in 2008. The court let him off with just a suspended fine of 7,200 Swiss francs, though the prosecution had pushed for a jail term of eight months. At a hasty press conference after the trial, as dozens of journalists clamoured to question him, Elmer told me, “I am on the right side of the street, so if I have to go to jail, so be it.” Besides violations of banking secrecy, he had also faced charges of threatening employees of Julius Bär.

Elmer later told me a car followed him home to a Zurich suburb after the press conference. Four masked men jumped out, and one pointed a gun at his head. “I thought that’s the end because that is the way the Mafia kills,” Elmer wrote in an email. “But it was the special force of Zurich Police.” He was arrested, and held in solitary confinement for 217 days over two stretches without formal charges. He described these events to me as part of a campaign of terror against him by Julius Bär and Swiss authorities, whom he sees as partners in a banking industry that encourages unethical practices in order to attract both licit and illicit international capital. “Even my wife and my six-year-old daughter were stalked, and the police did not care,” he said. “I was seen as a threat to national interest, and the powerful wanted to use me as a striking example to teach every banker what not to do.”

Elmer’s disclosures are part of a recent spate of leaks on the workings of offshore tax havens—jurisdictions whose laws allow clients, both individuals and corporations, to hold secret wealth, avoid taxes and bypass financial regulations in the territories where they live or do business. They provide a glimpse of what the Tax Justice Network, an international advocacy group, calls a vast “shadow economy” of banks, law firms and assorted companies and individuals scattered across the globe that help tax fugitives and criminals conceal their wealth from authorities. Given its secretive nature, gauging the true scale of this economy is impossible. But even by a conservative 2012 estimate from the TJN, tax havens harbour between $21 trillion and $32 trillion in largely untaxed financial assets. The consequences of this phenomenon are particularly acute for developing nations, whose debts are often dwarfed by the untaxed offshore holdings of their wealthiest citizens. In the case of India, citizens holding wealth in tax havens deprive the country of about two trillion dollars in tax revenues and investment every year—more than the country’s annual GDP—according to an estimate by Arun Kumar, an economics professor at Delhi’s Jawaharlal Nehru University.

With the growing emphasis on fiscal austerity following the global economic downturn in 2008, tax havens have come under increased scrutiny, particularly in developed nations. Earlier this year, the Organisation for Economic Cooperation and Development, a group of rich countries that the TJN describes as “the dominant global body setting standards for information exchange,” released a report proposing a new system of sharing financial information between governments, meant to make it harder for tax evaders to hide wealth offshore. Optimistic commentators have declared the report a “game-changer”; more somber analysts, including the TJN, have welcomed the proposal’s deterrent effect, but pointed out numerous loopholes and flaws. In particular, the TJN says, the new system’s benefits might not extend to many developing nations.

To date, often the only effective way to identify owners of hidden offshore wealth has been through leaked information. But while whistleblowers such as Elmer have spurred policy debate, occasional leaks have done little to erode the systemic secrecy that tax havens depend on. Currently, financial information on those holding assets in such jurisdictions is only shared on a case-by-case basis, if at all, after an official request from one government to another. This approach, described as an “upon request” system, is bound by the provisions of bilateral tax treaties. Many countries either lack such agreements, or find that authorities in tax havens routinely reject requests by citing their own banking secrecy laws or other technicalities. Switzerland, for instance, has declined repeated requests from the Indian government for information on account holders at the Geneva branch of the multinational bank HSBC named in a leaked list seized by French authorities in 2009. As justification, this May, Swiss authorities informed Indian officials of domestic laws that prohibit disclosures based on “stolen data” from whistleblowers.

In June, I spoke over the phone with Charles Monteith, the head of legal and case consultancy at the International Centre for Asset Recovery, a division of the non-profit Basel Institute of Governance. In the aftermath of the Arab Spring, the organisation has helped West Asian and North African governments freeze $1.3 billion dollars worth of illicit wealth held offshore by former dictators. Monteith identified numerous hurdles in the current system of information exchange. In cases where the group has been asked to help with official requests for information, he said, “90 percent have been legally incorrect, so they don’t get acted upon for months in the requested country.” Governments only entertain requests if there is sufficient reason to suspect wrongdoing under their own laws. This often places an impossible burden of proof on governments seeking information, especially in cases where the requested details themselves could be crucial evidence. Monteith said India has asked for assistance in numerous cases, and is likely to soon sign an agreement with the group to train enforcement authorities.

The OECD’s proposed system, meant to complement existing “upon request” provisions, calls for the automatic annual exchange of financial information between signatory states. So far, 46 jurisdictions, including India, have committed to adopting the new system by 2017. In a video call from Berlin in July, I spoke to Andres Knobel, who recently co-authored a TJN report on the new system’s implications for developing countries. He said the move towards automatic exchange was a significant step forward, but questioned whether the OECD seriously intends for developing countries to share in its benefits. The proposal makes no distinction between rich countries, which account for the vast majority of tax havens, and poor ones. It calls for “reciprocal” swaps, forcing poor governments to invest precious resources in gathering the requisite information in their own jurisdictions if they are to participate. “The governments of developing countries are not the only interest groups to consider,” Knobel said, “but also the ordinary citizens who are the real victims of illicit financial flows.”

But most ordinary citizens do not grasp the mechanics of tax evasion and money laundering, or the scale of the government revenue lost to it. As a result, there is often little domestic pressure for effective government action in developing countries, which again undermines whatever benefits the new international regulations might offer them. In June, I telephoned Arun Kumar at his Delhi office. Rhetoric aside, he said, there is little real will in India to tackle fraud among a “triad” of corrupt officials, politicians and businessmen who all benefit from the “black economy,” of which offshore wealth is a part. “Laws have to be systematically violated” for this economy to work, he said, “and that is possible only if the policy maker and the implementer collude with the offender. The black economy would collapse if any one of the components were to refuse to participate.” The situation has been analysed threadbare by more than forty committees since 1948, he said, and many suggestions have been put forward, but none have led to concrete government action. By Kumar’s count, the number and scale of major financial and political scams exposed in the country has grown exponentially, from just one each in the 1950s and 1960s to over 150 between 2005 and 2008 alone, involving billions of rupees.

Speaking from New York in June, James S Henry, a senior advisor to the TJN, told me governments should look beyond simply repatriating funds from a handful of notorious havens, and pressure rich countries to take legal action in their jurisdictions to deter capital flight from poor countries. He said that today, “indebted” developing countries effectively lend between $10 trillion and $13 trillion to rich states where their citizens invest their capital. Many of the firms and banks involved in the massive “global haven industry” are based in the “ultimate havens” such as London, Hong Kong, Singapore and Frankfurt, and not just in territories such as the Cayman Islands or Jersey. All these destinations have laws designed to attract capital from non-residents. “That is what makes this such a tough industry to fight,” he said. “And if anything, the power of the big banks has increased since 2008, not declined.” Henry insisted that banks must face much stronger punitive action than the fines they currently risk for facilitating tax crime. In many ultimate havens, opaque legal structures that hide account owners’ identities could mean the information shared under the new system is still insufficient to expose them. On balance, Henry said, the proposed rules “may only drive wealth to  big, ‘reputable’ havens” instead.

As things stand, though, in many tax havens whistleblowers often face greater punishment than unscrupulous bankers. In July, Elmer was slapped with fresh charges for sharing banking data with WikiLeaks and German officials between 2007 and 2011. When I called him a couple of days after the news came in, he was still unrepentant. “I have taken the bull by the horns,” he said, “to show civil society how systemic corruption works, and that it exists even in a country that praises itself as one of the best democracies in the world. I am not a victim. I am a big fighter against injustice.”

Keywords: corruption austerity WikiLeaks Swiss banks tax evasion tax havens Organisation for Economic Cooperation and Development information exchange