I suggested yesterday that I would have to blog on the ethics of Germany buying data from an informer to enable them to break open at least one Liechtenstein bank to uncover tax evasion by its citizens.
I believe in the rule of law. Tax is an artificial construct created and enforced only by law. This belief in the law is, as such, vital to my work. I also spend a lot of time opposing corruption. To therefore learn that Germany has secured data on tax evasion by its citizens in another sovereign place by making payment to an informer who had breached the law of that other place (Liechtenstein) in supplying that data presents me with a major ethical dilemma. Can such an act on Germany's part be justified ethically, in my opinion?
My answer is unambiguously that the answer is 'yes', it can be justified, but this requires explanation in the specific context of what a tax haven is and how it works.
Most people presume that the key identifying characteristic of a tax haven is that it offers a low tax rate, at least to those not resident there but who chose to use its facilities to record transactions (I stress, I am using words with care in this blog). I don't dispute this. Without low or no taxes these places would have no attraction. But let's also be clear, that is not enough to either explain the attraction of most of them, or the way in which they work. This is because the vast majority of the countries in the world tax their citizens on the basis of their worldwide income (as the UK does, for example, with its domiciled citizens). In most cases those citizens are also taxed on the income of companies, trusts and other such entities that they might create in other countries for the purposes of avoiding tax. This generally true with regard to trusts and foundations in particular in the vast majority of countries.
It is however precisely these companies, trusts and foundations that are the basic product of the tax haven. After all, the non-resident user of these places cannot move there themselves: for a start if they did they would become resident in the location, and most of them charge tax on their residents. That is not what the tax haven user wants. They do not want to pay tax. It is, therefore, these artificial entities such as companies, trusts and foundations that are essential for the exploitation of the tax haven by the person not resident there.
Liechtenstein has a particular type of such entity with which it is commonly associated. This is its 'foundation'. These are created under a law of 1926. Since it has changed little since then this article is a good one to look at if you want some detail. An article on Mondaq.com, aimed at UK lawyers summarises the use of the foundation as follows:
Family Foundations are versatile instruments which can be used:
- for enhanced anonymity;
- for protection of the Foundation's assets in general;
- for planning for a period of several generations;
- for protection of separate family members;
- for protection against the claims of creditors (segregation);
- for tax planning.
These are claimed to give rise to these advantages:
A unique combination of factors, being the practical non-existence of taxes and filing requirements, the guarantee of investor anonymity and a wide range of structuring possibilities enables the Liechtenstein attorney to structure a foundation which optimally meets individual requirements.
There is an important point to make about these characteristics though. None are intended for use by Liechtenstein residents. This is obvious for two reasons: first of all Liechtenstein does charge its residents to tax. They're certainly not going to allow the use of secret foundations so that these obligations are evaded. If that was Liechtenstein's intention they could pass other, and much simpler legislation to achieve this aim. But that wasn't their aim. This is apparent from the fact that foundations are, by law, not taxable when used by non-residents so long as they do not own trading entities in Liechtenstein but are if they do. Foundations are only untaxed outside Liechtenstein's domain.
So the foundation is then a deliberate construct produced in 1926 guaranteed to provide absolute anonymity for the creator and user, with no requirement that it ever file accounts or other records with any authority, or that it even maintain them. And it is non-taxable. But this benefit if not available to a Liechtenstein resident. That means the only real purpose of this entity created within Liechtenstein is to subvert the regulatory requirement of a place outside Liechtenstein. The foundation's purpose is not for use within the country that created it: it's purpose is to provide those living elsewhere with cover for their abuse of the regulation in the place where they live, be it with regard to tax or other issues. And what allows this abuse is not the low tax rate (although it does, of course, provide a motive). What allows the abuse is the absolute secrecy the foundation provides: a secrecy reinforced by the extraordinary banking secrecy laws of places like Liechtenstein.
I have considerable respect for a person's right to privacy. But all rights have limits. Eventually the protection of one person's right becomes the imposition of abuse upon another. This is the case of these banking laws. They exist only to prevent disclosure of the abuse that a person is making of the law of the place in which they live by using a mechanism created under Liechtenstein law but which has no purpose within its domain: its sole purpose being he facilitation of that abuse in another country.
Tax havens share the characteristic of low taxes. I can live with this characteristic if the country that offers those rates can do so without inducing artificial relocation of transactions to their domain by use of those rates. But even that relocation, which I consider unethical but which is not always illegal (I accept) pales into insignificance in the harm it causes compared to the abuse that is created by the secrecy legislation that is the other characterisations of some (but not quite all) tax havens. This is why they might be better called secrecy jurisdictions.
Liechtenstein created secrecy through its legislature. Its banks, trust companies, lawyers and accountants use those secrecy laws to sell tax abuse to the citizens of other countries. We know that a Liechtenstein company that happens to be owned by the ruling family has certainly done so to a significant number of German citizens. There is absolutely no way this story would have broken if that were not true. This effectively amounted to economic warfare by Liechtenstein (and at least one of its professional firms) on that State. After all, the structure created by Liechtenstein was designed to steal the economic resources belonging to another state. Most war is undertaken to control economic resources. I really see no real difference between physical war and what Liechtenstein is doing. And this is what all secrecy jurisdictions do. It's not an accident. It is their intent.
In the face of that act of deliberate economic aggression against its regulation Germany had a choice. Liechtenstein used its quite clearly corrupt statehood to abuse Germany's right to impose its own law on its citizens, as its right. This was deliberate interference by another state in its domestic affairs at considerable cost to itself. Without any legal recourse to Liechtenstein to stop this abuse (Liechtenstein is just one of three places left refusing any cooperation on stopping tax haven abuse) Germany has clearly decided to take the only other option available to it: to induce a citizen of Liechtenstein to break its rules on secrecy and to provide it with information on those German citizens that have broken German domestic law.
Is this ethical? Yes, it is, but it's only so on the logic that is also inherent, for example in the doctrine of dual effect. Doctors kill people all the time by inducing early death through the use of morphine based killers at levels that are fatal to alleviate pain as a person suffers with terminal illness. This is not a crime: the intention of the fatal dose is to relieve a greater harm, which is the hideous pain the person is suffering. The inducement of early death is acceptable in the circumstance because of the good that results from relieving pain.
So it is in this case. In the absence of another mechanism for stopping the challenge to the management of its own legitimate, democratically mandated laws Germany had to accept a lesser abuse: the cash-induced breaking of the secrecy law of Liechtenstein - a law promulgated for the purpose of abuse in the first instance. A greater good has resulted from that harm: a greater good that justifies that harm.
This action is therefore ethical, but just as killing remains undesirable within the doctrine of double effect, so is the action or making payment for illegal information undesirable and excused only by the exceptional circumstance Germany faced.
Or rather, I would wish it were exceptional, because it is not. Similar laws to those promulgated by Liechtenstein can be found in all the major tax havens that double as secrecy jurisdictions (and the term the 'usual suspects' is appropriate in this case). The abuse they promote, deliberately, is targeted at all the major democracies. It is regrettable that Germany has had to take this action. But it must hardly be alone in having considered doing so.
What is clear is that a better mechanism for stopping this abuse is needed. And what is also apparent is that the better mechanism might be directed in a number of ways, It could be directed against the state. It could be directed against the professional firms that use these laws (the organisations that constitute the so called 'offshore financial centres' - which is something of a misnomer in the case of Liechtenstein, which is one of just two double landlocked states in the world.)
And the law could be targeted against the user of the corrupt services Liechtenstein supplied. But what is abundantly clear in all cases is this:
- International agreement to beat this abuse is now needed;
- This agreement must recognise that states that promote laws to undermine the domestic regulation of another place have lost their sovereign right to non-interference as a result;
- The measures taken must be harsh if this massive abuse is to be eliminated;
- The measures must be coordinated.
I will return to this theme.