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.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I don’t know, Richard. I’m uncomfortable with the logic that a greater good justifies the harm done by the German government.
To be clear, I’m glad, in this instance, that the information has come out. I agree that this is a greater good. I agree that the secrecy laws of tax havens are unjustifiable, and are widely used to ill-effect. I can see that the German government had limited options, given these pernicious secrecy laws. I think that secrecy should certainly be done away with.
It’s just that I can see that logic (a government can break laws in another jurisdiction in order to acheive a perceived greater good) being applied in all sorts of ways, for example, in connection with the “war on terror”. I’m sure it’s the logic applied by the US government for extraordinary rendition, for instance. And I think that’s wrong.
It’s a grey area, ethically, and I can’t claim to have solutions. I like your concluding paragraph – certainly a better mechanism is called for.
Sheila
I share the discomfort. That’s why I wrote this. I like your analogy to the US. Guantanamo is an example of their willingness to ignore rights ‘elsewhere’.
I’d be uncomfortable if this situation had to persist. I hope it will be a catalyst for change. If it is it adds further reason though as to why it can be justified now.
But I’m open to persusasion otherwise.
Richard
[…] is it that they know that Liechtenstein’s financial services industry is based on the foundation, about which I wrote earlier today, and that the sole purpose of these foundations is to operate […]
If it were a bunch of Liechtenstein “special police” paying off a Volksbank offical in Mainz…this would be tremendous blow-up with the German authorities…so putting the shoe on the other foot might be curious.
Adding to this…I would guess that the Liechtenstein bank officals have called in special security personnel…and are basically reading the riot act to all employees…”a hunt to the ends of the earth if you betray our trust”…and it wouldn’t surprise me if some Russian security folks show up in the coming months to ensure no one else sells data.
But here is the pivot of this deal. There are thousands upon thousands of Germans who bank outside of the country. This little episode now turns into a learning experience…and the Germans will have to go to another entire level of investigation in the future to find these folks. Every bank will double their efforts and employees will be under constant watch.
And the employee who dumped the data? He is pretty much finished in the banking sector and almost every business that he might be interested in. Rumor has it that he wants German protection and to be resettle somewhere else. The Germans are acting like the deal is finished and they owe nothing else to the guy.
Roy
I think you’re right – a climate of fear pervades all tax havens.
And of course it will get harder to break these places from inside. That’s why we’ll have to break them from elsewhere.
Richard
1 doctors don’t give overdoses of morphine. thats illegal and called euthanasia and any doctor will go to jail for murder. An unbelievable thing to say.
2 germany had a lot of other options before resorting to a crime.
3 tax evasion is wrong. but so are a lot of things. to fix a wrong , there is a legal process which overides virtually anything let alone tax evasion. We are still debating DNA databases to protect a way of life ( by the way thanks to the past behaviour of germany!!!) let alone resorting to this to collect a bit of tax.
4 i wasn’t aware that germany had declared economic war on lichtenstein ( i’m not sure there is even such a thing). Even war has a legal precedent ie Iraq war.
5 there is and has been a concerted legal pathway to sorting out these issues and no one had reached the point of no return. germany simply broke rank when it fancied it.
Simple: The rule of law MUST override all else. two wrongs don’t make a right without exception. we are otherwise morally defunct and society cannot progress further morally.
there is and will be a heavy price to pay for this behaviour in the future which is not worth the tax due. Risk reward, paying for information to a criminal (and a very large sum at that) is not worth the risk of anarchy.
It really is sooooo simple. In time, these tax havens will eventually be defunct. Maybe not in murphy’s lifetime but they will. We could all then retain our credibility and society can move on and learn from its previous mistakes.
Ali
You’re right and wrong (but you don’t recognise grey)
1) Doctors don’t over-perscribe, of course. What they legally prescribe does hasten death.
2) Wrong – there is no option with Liechtensteion which will not cooperate
3) Tax evasion is a major crime against society
4) It was Liechtenstein who declared economic war, not Germany
5) Wrong – Liechstenstein refuses to recognise international law
I accept you right to differ.
But tell me, how will they be defunct if action is not ataken?
Richard
[…] by refusing to ask that question you’re pretending that the structure you created which is only designed to have effect outside your own state is not your responsibility when used […]
1 Morphine does not hasten death. it is not used for that purpose. it is used to relieve pain. It is a terrible example by you to attempt to describe a “greater evil” concept. It is just a completely wrong analogy.
The point here is how you serious tax evasion is and more importantly to what lengths we are prepaed to go to to completely eradicate it.
You seem to view it as almost in the top three most hideous crimes in society. I happen to think ( along I would say with most normal people) that although WRONG, it is simply not worth the comprises that the germans have made.
The fact is that the tax system in the western world works pretty well. WE COLLECT LOTS OF TAX. We can get more but in reality, the system of collection is good and is getting better. Now lets look at some really major crime against society ( your words ) against society and what we are prepared to do to eradicate it.
We are still as a society deliberating over a DNA database which would probably solve untold hideous crimes but WE ARE NOT PREPARED TO PAY THE PRICE because it has consequences . Rapes, child abuse. murders, etc are a lot more seriois than tax evasion. AND STILL WE DELIBERATE OVER A DNA DATABASE. This is just one example.
germany’s actions has SERIOUS consequences. It sets a horrendous precedent which is simply not worth the short term pleasure of nabbing a few quid of some rich blokes ( and its not even that much money AND its only one bank and a very small number of people)
Which goes back to my original point about this site. Tax is part of life. Factually the ste is excellent but it has serious serious limitations when tax and its issues start to encroach on life issues.
Its serious and obviously the be all end all of mr murphy’s life, but its not that serious.
ps
The UK with its non doms is arguably in a similar boat to Lichtenstein. The Russians want Abramovich’s money. Should they use polonium to get what they want????
Actually its a lot simpler and shorter than that !! :
IS THE PROCESS OF LAW MORE IMPORTANT THAN THE COLLECTION OF TAX?
the answer MUST be yes.
Tax is only a concept because of law otherwise no one pays it.
Break the law and you break all notion of tax.
That is quite aside from the plethora of horrendous long term side effects of setting that precedent in the first place.
[…] Answer, yes it is, HMRC can do this. Second is it ethical? I’ve already given my answer to that, here. The greater good justifies this action. Third, what will happen […]
[…] It gets worse. Tax havens offer secrecy. This is because those who use them are lying to their home country authorities and do not want to be caught. Tax havens offer structures that are intended to encourage deception. A post on Richard Murphy’s Tax Research blog describes how Lichtenstein does this. […]
[…] to undermine the impact of legislation passed in other jurisdictions. These are deliberate acts of economic aggression targeted at sovereign […]
Is the legality of the German authorities using this data really so fraught?
Employees invariably have a duty to keep their employers business confidential but we think they have a right and duty to blow the whistle on any wrongdoing they discover.
The police pay informers for information and no-one has a problem with that.
“Tax is only a concept because of law otherwise no one pays it.” That’s true but property itself only exists because of law so I don’t think we need to worry too much about the rich abandoning law altogether.