February 25, 2008

LGT Dragnet Reportedly Widens

THERE COULD BE big trouble ahead for more of Europe's wealthiest citizens. According to the Times of London, a now-infamous bank informant has apparently sold data about clients of Lichtenstein's LGT Group to the British tax authorities for some £100,000. This follows a scandal which erupted in Germany, when the same informant sold client data to the German tax authorities for the equivalent of £3.2 million. Armed with the data, the German tax authorities have gone after their targets with the Teutonic sadism one would expect, and one would expect the Inland Revenue to also conduct a thorough investigation. In all, the LGT data reportedly covers some 1,400 rich people from around the world, about half of whom were German.

This is a fascinating story on bunches of levels, but unless you've been following it closely, it requires a bit of background.

Lichtenstein is a tiny little country in middle Europe: a holdover from the myriad tiny states that made up the Holy Roman Empire. It has all of 35,000 people. Its monarch, His Serene Highness Prince Hans-Adam II, actually has a bit of power. It is a very pretty country and has great skiing.

After World War II, it was broke.

Realizing that being poor sucked -- and perhaps realizing their country was tiny and would have trouble quelling a beer hall fight, much less stave off foreign invasion -- the Litchtensteiners cleverly figured out a way to make themselves indispensable to Europe. Simply put, they turned the country into a tax haven. Now Liechtenstein is rich and prosperous. It also has many private banks, which secretly safeguard untold billions of dollars of wealth. Reportedly, some of this wealth may not have been adequately taxed by the depositors' home countries, but Liechtenstein took the rational view this was none of their business. You can do this when you're your own country.

Thus, when data about foreign nationals' bank deposits got out onto the market, there was a grand hue and cry. For one thing, this is all hugely embarrassing for the LGT Group, the financial firm whose data was compromised, because an important part of being a secret tax haven is, well, secrecy. This is also embarrasing for the Government of Liechtenstein, since the House of Liechtenstein owns the LGT Group. (You can do this when you're your own country). Now, with reports that records from a second bank are in the hands of the German tax authorities, it's become hugely embarrassing for the whole country. As if that wasn't enough, now the Germans are up in arms that hundreds of their wealthiest citizens duped them for so long, and want Liechtenstein to stop what the Germans consider aiding and abetting tax evasion. It may be the Liechtensteiners tell the Germans to go pound sand, but we'll see how it all turns out. Germany may have ways of making them cooperate.

The informant who originally sold the data also, according to The Times, offered to sell data to the tax authorities in France, Canada, Australia and the United States. Heh. Now that could prove interesting. Since America taxes its citizens on a global basis -- you pay no matter where you earn the income -- it seems almost certain at least some Americans will get caught up in the dragnet. It would be even worse, of course, if it turned out those Americans had funded their accounts/trusts/investments with untaxed dollars.

On the other hand, though, I don't know how many Yanks will get caught up in this dragnet. For one thing, there are plenty of offshore havens closer to America than Liechtenstein -- the Bahamas and the Caymans, for instance. For another, the United States' tax regime isn't all that bad -- and clever rich people can structure things so their tax rates are actually quite reasonable. When you have long-term capital gains taxes at 15 pc, it's not exactly confiscatory -- even when you add in the AMT along with it.

This is, one must note, in sharp contrast to Europe's stupidly punitive tax rates. In France, for instance, the top income tax rate is 48 pc; in Italy, it is 43 pc; Germany stands at 42 pc and the UK rings in at 40 pc. Those European rates don't include things like value-added taxes, wealth taxes or other such levies that make the tax burden even more crushing. Plus, the European systems aren't as generous as ours when it comes to credits, deductions and the like. So there's a lot less incentive for Americans to try screwing around with the Government's tax authorities, which The Rant would note is Really Not a Good Idea.

That said, I can't argue that holding money abroad is prima facie evidence of skullduggery, either. If anything, holding a small amount of one's money in reserve someplace else might be useful, especially if things go to hell in the United States and we're all fighting each other for canned goods. However, if that's a route you follow, you are expected to report your holdings accordingly to the Internal Revenue Service -- and this incident involving Liechtenstein shows that reporting those holdings would be a good idea. In situations like this, it's a hell of a lot easier to ask for permission than forgiveness.

Posted by Benjamin Kepple at February 25, 2008 11:41 PM | TrackBack
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