A Spanish court ruling and investigations spurred by whistleblowers are aimed at scaring tax evaders and raising revenue. One watchdog's list could lead to some 300 billion euros in tax havens.
Juan Carlos Hidalgo/Reuters
An intense diplomatic and public push is under way across Europe and in the United States to more aggressively hunt illegal cash stashed away in offshore paradises like Switzerland, Luxembourg, Austria, and Andorra.
Spurred by court rulings as well as investigations triggered by several whistleblowers, countries are tapping new information to scare tax evaders and raise public revenue during tough times. And they're pressing for reform of bank secrecy laws that allow billions in illegal money to be shielded from government oversight.
The issue is a politically charged one, especially in Switzerland, where bank secrecy is as ingrained as neutrality and cuckoo clocks. But the endgame is in sight, according to analysts.
Strict laws, like the Swiss one barring banks from surrendering clients' information, make it “hard to trace” suspicious transactions, says Niels Johannesen, associate economics professor in the University of Copenhagen and an expert in off-shore banking. “But I’m sure that as these cases build up people will be more afraid of hiding their money.”
Last week, a Spanish court rejected a Swiss extradition request for the whistleblower who stole clients' account information and is helping authorities comb through the data. Their secrets have limited legal use, as banks would first have to surrender their clients’ information to confirm the stolen information, whether its money laundering, tax evasion, or transactions in violation of international sanctions, experts say. Doing so would violate Swiss law.
But the court decision does pile on already intensifying pressure. Swiss accounts hold more than $2 trillion in offshore wealth, and nearly 35 percent of the more than $8 trillion globally.
The Spanish ruling said that Hervé Falciani, a French-Italian computer expert at HSBC Bank until 2008, is free to travel after being under court custody since his arrest last year. He had illegally entered Spain following the advice of “the Americans,” which most took to mean the US government. They warned him his life was in danger, without saying from whom, Mr. Falciani said in an interview last month with El País, a Spanish daily.
Falciani for years has been helping French authorities, who initially seized his trove of information stashed in encrypted memory drives in 2009, to decrypt and understand information on reportedly 130,000 millionaire accounts in the Swiss branch of HSBC.
France has been sharing the information with other countries. The Falciani list could reveal the existence of 300 billion euros that had found its way to havens, equivalent to 2.5 percent of the eurozone’s gross domestic product, suggested Spanish prosecutor Dolores Delgado, who represented the government in the extraditions hearings.
Today Falciani is one of the main sources for tax evasions and money-laundering investigators in the US, Germany, France, Italy, and of course Spain. The court’s denial was expected because Swiss charges of violating bank secrecy are not a crime in Spain.
“His help is not just in finding money that was hidden from tax authorities, but in revealing methods employed by HSBC that allow money laundering by drug-traffickers and terrorists,” Mrs. Delgado has said.
The stolen information is legally hard to use, though, and would in any case require offenders to voluntarily settle out of court or for banks to share account information. Banks can legally refuse, especially when it’s subject to criminal investigation of violating Swiss bank secrecy laws, as is the case with Falciani’s list.
Spanish investigations indeed illustrate the challenges. Of around 250 million euros recovered as a result of the Falciani list, more than 200 million euros came from an out of court settlement with the Botín family, which controls Banco Santander, Spain’s biggest and a global banking titan. They admitted to having an undeclared bank account that they claimed they didn’t know about, and settled out of court.
“The problem is that the information is stolen, and legally speaking would have to be confirmed by the bank. It’s been more of a political issue,” says Pablo Alarcón, a law profesor in IE Business School and also a partner in Alarcon Espinosa Abogados firm, which specializes in wealth management.
But the very public, and often embarrassing, exposé of undeclared accounts is catalyzing change. Mr. Alarcón says that Swiss banks are being significantly more strict about internal screening, in fact closing down the accounts of some of his clients after failing to comply with requirements to show that the money has been declared to taxing authorities in their home countries.
“They don’t see Switzerland as destiny for off shore holdings,” Alarcón says.
But the Falciani affair and the refusal of his extradition does increase pressure on Swiss banks, politically. Rejecting his extradition “is part of the same pressure that the US and Germany are putting Switzerland under,” Alarcón says. “It’s a message to share more information.”
The public disgrace of well known names, like the Botín family in Spain, but also former French Budget Minister Jérôme Cahuza, German football legend Uli Hoenes of Germany, and an ever growing list sourced from stolen information, at times paid for by officials, is helping governments to force tax evaders to settle out of court.
Luxembourg already agreed to share more information starting in 2015, and Austria is reportedly close to an agreement. Switzerland is the most ingrained holdout, but it too is also moving in that direction.
“What would make a difference is automatic sharing of information” as opposed to upon request, Johannesen says. The Swiss government already reached a deal with US authorities since the Treasury Department is increasingly target banks. Several banks have already signed agreements, under the threat of being booted from the US. HSBC agreed to pay $1.9 billion in an out of court settlement for money laundering allegations involving Mexican drug cartels.
Europe is increasingly trying to reach a strong consensus. Switzerland “knows they can’t negotiate with the US, but with EU they are still holding out,” Johanessen says. “It depends what EU consequences are. How much can they threaten? The US strength is its severity. The question is if the EU can agree on something similar.”