Secret Lives of the Super Rich

According to the DSTG, the professional association for German tax experts, tax evasion has become a national pastime in Germany. The head of the association, Dieter Ondracek, estimates that the amount of money involved in annual tax evasion reaches 30 million euro ($43.7 million).

Secret Lives of the Super Rich
By John Goetz, Conny Neumann and Barbara Schmid

Prosecutors and tax investigators are once again going after millionaires who have hidden their assets in foundations with Lichtenstein's LGT Treuhand in what has become the biggest tax-evasion scandal in German history. After years of hide-and-seek, many are relieved to have been discovered.


DPA
Liechtenstein's LGT Bank: "Simply knowing that they are rich gives them the greatest pleasure."


The investigators were more discreet this time -- no cameras, no flurry of flashbulbs, no live broadcasts from the scene of the crime. In fact, authorities were anxious to avoid repeating the sort of spectacle that had unfolded when officials searched the home of Deutsche Post CEO Klaus Zumwinkel in Cologne back in February.

There were no streets being sealed off in the early morning hours last week, nor were there any flashing lights or even officers in uniform. Instead, about a dozen men and women arrived in inconspicuous cars, rang doorbells during normal business hours and disappeared into several Munich villas and commercial buildings without even attracting the neighbors' attention.

For their latest wave of house searches, prosecutors and tax investigators from the western German city of Bochum have set their sights on a handful of Munich millionaires. Authorities believed that the would-be suspects, like Zumwinkel, could be guilty of tax evasion in Germany, illegally parking their money with foundations operated by the LGT Treuhand bank in Liechtenstein.

The investigators' suspicions are based on the data on DVDs that Heinrich Kieber, a former LGT employee, sold to the BND, Germany's foreign intelligence service, for €4.6 million ($7.1 million) in mid-2007. The damaging collection of data contains up to 900 files with information about the hidden assets of German investors.

An Investment with Golden Returns

Including the Munich finds, there were close to 200 cases against LGT customers noted on the Kieber DVDs. More than 200 tax evaders have turned themselves in, as have another 330 people who erroneously believed that they were on the list. Purchasing the DVDs turned out to be a worthwhile investment for the government, with tax authorities already collecting up to €250 million ($390 million) in advance payments.

In their latest series of raids in Munich, investigators focused on several "especially hard nuts to crack." The names on the list are not part of the Bavarian capital's flashy jet set, but instead belong to the more dignified, inconspicuous old-money aristocracy. Those who don't cooperate and confess could face tough penalties, possibly even jail time. Prosecutors plan to take drastic action in the case.

A few of the suspects attempted to avert disaster at the last minute. One extremely rich Munich resident allegedly turned himself in. He is believed to have hidden at least €1 million in one of LGT's foundations.

But the man was out of luck. Tax authorities apparently received his amended tax return exactly four minutes too late. At precisely the time recorded on the tax office's fax machine, investigators were already inside his Munich mansion.

One Hamburg heir, who is also believed to have stashed away millions in a Liechtenstein foundation, apparently submitted his amended tax return in time. From faraway Mallorca, where he officially resides, he can now breathe a sigh of relief as German investigators continue their crusade.

The owner of a luxury hotel in one of Bavaria's most appealing vacation regions was also quick to repent. In time to avoid prosecution, the man confessed that he had used a Liechtenstein foundation to conceal millions of his assets from German tax authorities.


DPA
Bavarian privacy commissioner Karl Michael Betzl: One of the southern German state's most respected officials has become embroiled in the country's biggest-ever tax evasion scandal.
But Karl Michael Betzl, the Bavarian government's commissioner for privacy protection, can expect to face a more lengthy investigation. Betzl, one of the most respected senior government officials in Bavaria, is alleged to have hidden about €700,000 in assets in a family foundation under the LGT Treuhand umbrella. State prosecutors in the western German city of Bochum in North Rhine-Westphalia have since been forced to transfer the case to their Bavarian counterparts in Munich. Betzl, who has been temporarily suspended from his position, also stands accused of being an accessory to social security insurance fraud.

When they searched Betzl's residence, authorities found large numbers of envelopes, each containing between €300 and €500 in cash. Betzl apparently claimed that he was holding onto the cash for a young woman living on government assistance. But the woman, he added, was living with a wealthy acquaintance and didn't need the money at the moment. Betzl told Alois Glück, the president of the Bavarian state parliament, that he was innocent and would clear all the accusations against him. He also claims that he no longer has the alleged €700,000.

Moving Billions to Liechtenstein

For the Bochum investigators, the suspects' stories paint an odd picture of the habits of wealthy Germans. The smallest fish among them have "only" taken €150,000 across the border, while a handful of the ultra-rich have stashed away up to €35 million in Liechtenstein foundations. The biggest fish caught in the investigations conducted to date is a northern German textile manufacturer who allegedly owes €800 million in back taxes. To owe that much, he would have to have moved several billion euros to Liechtenstein.

Some LGT customers seem practically relieved that the game of hide-and-seek has finally come to an end. Many felt hounded by the thought of their illegal millions. Munich attorney Klaus Höchstetter says that some of his clients have even suffered from sleeplessness and cardiac arrhythmia as a result of their family secrets.

The constant fear of being discovered has settled over their lives like a dark shadow, preventing them from enjoying their expensive cars, luxury vacations and lakeside villas. Many consider their situation to be so hopeless that they have not touched fortunes that their grandfathers once parked in a Liechtenstein foundation for decades. "Many don't even know how much they have in the accounts now. They say to themselves: Let my children worry about it," says Höchstetter.

Some of the tax evaders are so relieved that they have literally welcomed investigators with open arms. In March, when Bochum Public Prosecutor Margrit Lichtinghagen paid a visit to a wealthy Munich resident who had hidden roughly €1 million at LGT, he served her coffee and cake before opening his file cabinets. "I am honored that you are coming to me personally," the man confessed, "now I will be able to sleep well again."

Investigators have been as surprised by the tax evaders' bad conscience as they have been by the suspects' insatiable greed. During the course of the LGT investigations, Munich tax expert Jan Olaf Leisner met clients who, loath to buy a briefcase, carried the account statements for their Liechtenstein millions into his office in shopping bags from the discount supermarket Aldi. Apparently they felt file folders would have been too expensive. Others had been living in depressing apartment buildings on the city's outskirts for years, with plastic chairs on their balconies and threadbare furniture in their small, poorly ventilated living rooms. One tax evader, who is believed to have several million euros hidden away in Vaduz accounts, even collects German welfare payments for the long-term unemployed.

One of the first things that struck investigators about Zumwinkel, the former CEO of Deutsche Post, was his frugality. A multimillionaire, he lived in a large mansion, and yet when officials searched the house they encountered threadbare carpets, dilapidated cabinets and a neglected swimming pool. Bonn attorney Karsten Randt is one of a handful of lawyers representing clients in the LGT case. He refers to their behavior as the Scrooge McDuck Principle. "Simply knowing that they are rich gives them the greatest pleasure," he says.

But it is a pleasure that few are eager to share, not even with their own families. One of Randt's clients was a parsimonious mid-level civil servant who showed up in his office one day with securities worth €500,000 ($775,000). The man told Randt that he was plagued by his bad conscience and wanted to turn himself in for tax evasion. He had one problem, though: He was afraid to go home alone. For years his wife, who had no knowledge of his financial dealings, had been forced to live in a small rented apartment in the Rhineland region. The man had even denied his wife the money for a cheap vacation. The attorney had to help the man confess his secret fortune to his wife. "But his fears of divorce," says Randt, never materialized.

Stashing Unclaimed Cash in Socks and Panties

In the wake of the Kieber revelations, an 80-year-old man from Bavaria, fearing that he would lose his fortune, hid his millions in his socks and made countless trips to bring them back to Germany from Liechtenstein.

Meanwhile, the panic among tax evaders is driving up legal fees. According to one lawyer, tax evaders are willing to pay even the most astronomical of fees to avoid trouble with the tax authorities. After the Bochum investigators had conducted their first searches, the number of clients at respected law firms specializing in tax issues began growing week after week. "We are earning a living on the basis of people having believed that they would never be caught," says one attorney.

TAX EVASION IN GERMANYAmount
According to the DSTG, the professional association for German tax experts, tax evasion has become a national pastime in Germany. The head of the association, Dieter Ondracek, estimates that the amount of money involved in annual tax evasion reaches 30 million euro ($43.7 million).
Foundations in Liechtenstein

Unlike in Germany, where foundations serve a specific not-for-profit purpose , the law in Liechtenstein allows the founders of a foundation to benefit themselves and their dependents. Tax rates for foundations in Liechtenstein are also very low and are exempt from property, earned income and profit taxes. Only an annual capital tax needs to be paid, which amounts to 0.1 percent of the paid capital or 1,000 Swiss francs (620 euro/$904), whichever is greater. For capital valued between 2 million Swiss francs and 10 million Swiss francs, the tax rate is 0.075 percent. Capital valued above 10 million Swiss francs is taxed at a rate of 0.05 percent.
Cover-Ups

German tax authorities have no problem with interest made in Liechtenstein as long as it is declared in tax filings. To keep the money hidden from German financial officials , according to the DSTG, many people start foundations using a name that doesn't identify the founder and entrust the foundation's management to a trustee. According to DSTG estimates, within Liechtenstein's 160 sq km, there are roughly 80,000 letterbox companies , many of which share an official address with many foundations. To hide even more tracks from the tax investigators, the foundation's capital can be deposited in a Swiss bank account.
Bank Secrecy
Unlike Germany, Switzerland and especially Liechtenstein have very strict bank secrecy . This is supposedly part of Liechtenstein's "basic attitude and tradition," as the country's Web site says. Financial institutions in Liechtenstein strictly reject all requests for account information even from German tax investigators.

The panic is justified. The rule of thumb for anyone who doesn't cooperate with the investigators is one year in prison for each million in unpaid taxes. But even without a prison sentence, many could still face financial ruin. In the interest of simplicity, investigators have developed a flat-rate table to compute tax debts. A fine of €2 million ($3.1 million) is imposed funor each million in evaded taxes, bringing the total amount due to €3 million ($4.65 million). Tax evaders who turn themselves in voluntarily and those who submit extensive confessions are given a discount. In many cases, tax evaders stand to lose one-third or more of assets parked illegally abroad.

A few of the tax evaders named on the Kieber DVDs are no longer in a position to pay such large amounts. They invested in a special product that LGT Treuhand had offered: black funds, which acquired the name because no financial statements are published. The customers were led to believe that these investments were especially safe. Accordingly, the fees were high.

But under German law, such funds are subject to especially high punitive taxes that can amount to up to 90 percent of the invested capital. Almost all of the LGT customers now known to authorities invested in black funds and find themselves faced with a 90-percent tax, on top of the double penalty. Many have no idea how they can come up with the money to pay the fines.

The more the details become known, the greater is the astonishment among experts over how amateurishly these assets were managed in the Liechtenstein foundations. "Their main concern was to hide the money from the tax authorities. Nothing else mattered," says attorney Randt. According to Randt, investors no longer cared what the bank was doing with their money.


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The tax evaders would only occasionally contact their bankers in Liechtenstein, and when they did they were required to state a password, like "Alpenglow" or "Pussycat." Fearing that they would forget their passwords, most of the owners of foundation shares carefully entered them into their address books -- to the delight of investigators.

Caution was of little use for one especially nervous Bavarian retiree. Fearing discovery, she had her Liechtenstein account registered in a friend's name. After that, she paid no further attention to her hidden assets. But when she decided to turn herself in, she found that both her account information and her money had become inaccessible. The friend refused to provide the information to tax authorities, claiming that it was her money. It will be difficult to prove her wrong.

A well-to-do Munich pharmacist considered herself above suspicion. A few years ago, the 65-year-old had inherited about €2.75 million from her husband and deposited it abroad. Whenever she needed money, she would take a train to the bank, make a withdrawal and hide the cash in her panties. But customs investigators from Germany's southern Allgäu region became suspicious. While traveling on the Eurocity 93 train between the two Bavarian towns of Lindau and Memmingen, she was asked to remove everything she was carrying on her person -- including the €150,000 she had been smuggling.

Insurance Packages and Office 'Mock Dawn Raids'

Although it has long been clear that the Bochum investigations have already mushroomed into Germany's biggest tax scandal ever, the number of possible suspects is apparently much larger than anticipated. "Private companies are getting ready," says Roswitha Müller-Piepenkötter, the justice minister for the state of North Rhine-Westphalia. Some have their employees play the board game "Razzia" to prepare them for visits by tax inspectors.

Linklaters, a high-end Düsseldorf law firm, even offers its clients "mock dawn raids." "Agitated employees are quick to make mistakes," says attorney Anne Federle, explaining that there is growing interest for programs that offer professional preparation for unannounced government raids.

Roland, a German insurance company, even offers a "Detention While Awaiting Trial Package," including per diem and a pickup service for the company limousine. The package also includes a good defense attorney -- and high blood pressure tablets.

Translated from the German by Christopher Sultan.