Paradise Papers: Tax Evaders Evade Criminal Consequences While Whistleblowers Suffer

This is the second in a series of articles on offshore tax evasion. For the first on how it’s done, click here.

IRS Building in Washington, iStock

IRS Building in Washington, iStock

The Paradise Papers are merely the most recent in a long line of major leaks that extensively list the names of the super-rich with bank accounts in secrecy jurisdictions. Massive data leaks began more than a decade ago, received little to no attention at the time, and were woefully underreported by the mainstream media. All the whistle-blowers were prosecuted and the tax evaders were not.

This is the story of how a group of journalists picked up the fight against the governments’ prosecution of these bank employees of conscience and how it has developed a strategy to protect them from government criminal prosecution. This is also the tale of how broken the media coverage of bank whistle-blowers’ evidence is, where the battle to expose this evidence is today and about the battles that have yet to be fought. Yes, I’m referring to that group with the dreary name — The International Consortium of Independent Journalists (ICIJ).

Our story begins in 2005 with a US citizen, Bradley Birkenfeld, a private banker who had worked in the department of a Swiss bank, UBS (formerly the United Bank of Switzerland), the world’s largest bank. It marketed tax savings schemes for its super-wealthy customers. Birkenfeld’s superiors had told him that the plans might be aggressive, but all were legal. However, he came across a letter on file from the bank’s lawyers saying that in fact, these schemes were criminal.

Birkenfeld understood that the purpose of this letter was to provide a defense for the bank. If any of its employees got caught, it wouldn’t say it did not know what they were doing and this is the proof that they were told not to do it. After pointing out this conflict between what he was told verbally and what was said in writing and getting no satisfaction, Birkenfeld left for another bank.

Shortly thereafter, in 2006, the U.S. Congress passed the Tax Relief and Health Care Act, suggesting that they were getting serious about stopping tax evasion by the 1%. One section of the act promised immunity for whistle-blowers and a share of the money recovered as a result of subsequent legal action. Birkenfeld immediately contacted the Department of Justice and arranged for a ‘Queen for a Day’ immunity to come to the US, show what he had to offer, get immunity and a percentage of the recovery.

Under Swiss law, Birkenfeld committed a serious criminal offense if he gave any information about Swiss Bank accounts unless it was pursuant to a subpoena. If the Swiss authorities found out about his meeting with the DOJ, they would clap him in jail for a good long time. The DOJ refused to issue a subpoena after seeing Birkenfeld’s evidence. He was now in a situation where he couldn’t stay in the US because he might be charged by the DOJ and couldn’t stay in Switzerland.

Birkenfeld’s lawyer arranged to have a Senate committee subpoena him so he told his story again and in more detail to the Senate, including information about his golden goose client, a Russian billionaire, Igor Olenicoff, now enjoying both the California sunshine, forged art, and US-style tax evasion.

Olen Properties headquarters in Newport Beach, CA owned by Igor Olenicoff, a Russian billionaire property developer, Olen Properties Corporation of Newport Beach. (Photo by KEN STEINHARDT, Orange County Register/SCNG)

Olen Properties headquarters in Newport Beach, CA owned by Igor Olenicoff, a Russian billionaire property developer, Olen Properties Corporation of Newport Beach. (Photo by KEN STEINHARDT, Orange County Register/SCNG)

So now, the DOJ had the hard evidence of the bank account data and Birkenfeld’s explanation of it to connect the dots. They also had evidence of massive tax evasion by a Russian oligarch. What do you think the DOJ did? If you have read my former articles about the DOJ’s office — here and here — you’ll know immediately.

The DOJ reneged on its amnesty deal with Birkenfeld claiming that, although he disclosed his dealings with Olenicoff to the Senate, he didn’t tell the DOJ. Their deal with him was off.

The DOJ prosecuted Birkenfeld to the full extent of the law and secured a 30-month jail term of which Birkenfeld served every minute. It gave a sweetheart deal to the Russian billionaire. He had to pay his multi-millions in tax arrears — no jail. Curious, is it not?

After his release, Birkenfeld got a $104 million payment proving his data was good and the IRS collected on at least some leads. However, as The New York Times reports, the money collected may have been from scared Americans who invoked and were granted status under the IRS tax amnesty program not from investigations using the leaked data.

And so it continued. There were a number of leaks following, all with the same result in most countries — except Germany and France. The banks called the whistle-blower a greedy thief. The government prosecutor’s office persecuted them and the tax departments did not use the leaked lists.

Germany Shows Us How It’s Done

In 2006, Heinrich Kieber, a data entry clerk at LGT (Liechtenstein Global Trust) sold a treasure trove of secret bank accounts information to Germany, Britain and the U.S. for €4.2 million. Liechtenstein charged him with theft and offered a $10 million reward for his apprehension, but Germany gave him witness protection. Kieber is now in hiding, a fugitive.

Germany is the only country that has protected bank whistleblowers and has used the data openly to prosecute tax evaders. It is no coincidence that both the Panama Papers and the Paradise Papers were leaked first to a German newspaper.

If we wonder why Germany can afford to give free higher education, perhaps one reason is that it makes its 1% pay their fair share of taxes.

Another leak by Harve Falciani, systems engineer of a Swiss branch of the HSBC, was a turning point in the battle to shame government tax departments into action.

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Hervé Falciani in 2013, WikiMedia Commons” class=”aligncenter size-full” />Hervé Falciani in 2013, WikiMedia Commons

In early 2009, Falciani leaked records disclosing about $100 billion in evaded taxes to France’s then-Minister of Finance Christine Lagarde, now the managing director of the International Monetary Fund. The information, known as the Lagarde List, was then shared with other countries including the US, Canada, and Britain.

As with the other whistle-blowers, the information Falciani brought the French was accurate. A French parliamentary report found that of the 2,325 French taxpayers disclosed through the Falciani leak who had accounts at HSBC in Switzerland, just three had paid their taxes. By late 2015, France had recovered £188 million in lost tax revenues.

The Swiss government rejected Falciani’s status as whistle-blower. It charged Falciani with industrial espionage claiming he was stealing the data to sell it — even though he received no money from the French government for the leaked data. In November 2015, the Swiss courts agreed and sentenced Falciani to five years in jail. Falciani was a greedy thief, the Swiss government maintained at trial, who was stealing to sell. His intent to profit took away his whistle-blower status. “The whole construct of the white knight is just a web of lies,” it said.

Although this was a decision of a Swiss court only, it was a major psychological victory for tax evaders everywhere. It established an intellectually dishonest legal precedent (not binding outside of Switzerland) that if a person gets any money for disclosing criminal behavior on the part of a bank or a government, that person does not get whistle-blower protection because their intent was, in part, to earn money, not to expose crime selflessly. In Switzerland, he is to be treated as a thief, not a Robin Hood.

The decision is intellectually dishonest because whether the whistle-blower got paid for the data does not in any way detract from the reliability of the data. Falciani’s data was thoroughly tested by France and found to be accurate. In fact, the information was so accurate and complete that HSBC accepted fault and paid a fine of about half a billion dollars to the French government.

Bank whistle-blowers take a huge risk. They not only give up secure high-paying jobs but face huge legal bills in defending against government prosecution. Here is the way The Tax Justice Network describes what Rudolph Elmer suffered:

For twelve years now whistle-blower Rudolf Elmer has been fighting Swiss banking secrecy, with court case after court case. He’s been imprisoned, victimized, and his family has been harassed. His reputation has been systematically ripped apart in a way that we believe is intended as a deterrent to other potential whistle-blowers.

Today, Falciani is in hiding, changes his identity frequently and wears disguises. He fears for his life not only from Swiss authorities and Interpol but also from members of organized crime and political families of Third World countries whose names are on the list.

Minimal Consequences For Tax Evaders In The US

A little legal administrative background is needed before we go on. The tax departments, like the IRS, are charged with the initial investigation and finding if there is enough evidence to lay charges. The tax department gives its findings to the justice department. The criminal justice department has the responsibility to prosecute. If the tax department doesn’t investigate, nothing happens to tax evaders.

In the US, the UK, and Canada, the tax departments did nothing about the names of the Lagarde List. Hiding behind the need for taxpayer confidentiality, no one revealed the names on the Lagarde List and what had been done. The tax departments gave the usual political babel of all being dedicated to the highest standards of enforcing tax laws etc., but would not answer specific questions relating to the list. They would give global figures about the number of people who either made voluntary disclosures or were charged with tax offenses — but never specifics relating to the Lagarde List.

Five years after the leak, Paul Lewis of The Guardian asked the IRS what it had done as a result of the Lagarde List. Here’s what he got:

“The IRS declined to say how much it has retrieved in back taxes, interest and penalties as a result of investigations stemming from the leaked HSBC Swiss data. The IRS also declined to say how many US taxpayers have been investigated as a result of the leak, citing taxpayer privacy and the Tax Information Exchange Agreement (TIEA), a treaty that renders secret information exchanged between the US and France banks. The DOJ said it ‘does not confirm or deny the existence of an investigation.”

In short, the IRS said, we’re not telling. It’s none of your god damn business, journalist.

To be fair, the IRS spokesperson said it, “remains committed to our priority efforts to stop offshore tax evasion wherever it occurs”, and pointed out it has collected more than $7 billion from a voluntary disclosure program, introduced in 2009, that allows US taxpayers to voluntarily tell of previously undeclared offshore accounts.

Tax Information Exchange Agreements (TIEAs)

But that data was not shared pursuant to the TIEA (Tax Information Exchange Agreement). That act applies to data voluntarily provided by banks about foreign resident accounts in their country. This data came from a government about bank accounts in another country. The secret voluntary disclosure program allows tax evaders whose name appears on the list to come forward and get a secret deal. Their names are never disclosed, nor is the amount they pay.

The DOJ did prosecute foreign banks for assisting in tax evasion such as Birkenfeld’s former employer UBS and negotiated fines of which there is a public record. But there is no public record of what has been done with the names of the wealthy individuals on the leaked lists.

More Of The Same In The U.K.

Falciani said that he had emailed and phoned the U.K. tax authorities in 2008. They told him they were not interested.

On this one point, however, the Civil Service was not going to take the hit for the politicians. Lin Homer, chief executive of HM Revenue & Customs, said that civil servants alerted Ministers in 2010 about the leak that uncovered avoidance and evasion on an industrial scale at HSBC Suisse.

Homer insisted staff in her department had been diligent in their approach to investigating the Lagarde List files. She said their record of securing a lone conviction and £135m in unpaid tax, fines and interest compared well with other countries — but as all that data is kept secret and it is impossible to verify. However, Homer is probably right that a single conviction for tax evasion based on the Lagarde List does compare favorably to what happened in the US.

<a href=

Chancellor George Osborne, 2015” class=”aligncenter size-full” />Chancellor George Osborne, 2015

In 2012 George Osborne, Chancellor of the Exchequer (roughly equivalent to the U.S Secretary of the Treasury), signed a deal that included a commitment that the UK would “not actively seek to acquire customer data stolen from Swiss banks.” Wealthy Brits who evaded tax using Swiss accounts could relax — until the Panama Papers blew those kind of sweetheart agreements apart for the foreseeable future.

Worse In Canada

If you think deception by the politicians is more dangerous than honest refusal to prosecute, it’s worse in Canada. Fortunately, we have the product of some astute journalists at the Canadian National Broadcasting (CBC) to help lift the lid on the black box of tax evasion deals.

Three years after the Canadian tax department (the Canada Revenue Agency-the CRA) had secured possession of the Falciani data (2009), opposition MPs demanded a report from the Minister of Revenue in Parliament on what the CRA had done with it. In October 2013, Minister of Revenue, Gail Shea, claimed privacy laws protected the possible tax swindlers from public disclosure, but gave a minimal statistical outline without details, such as names that reporters could check.

The Honourable Minister’s report to parliament claimed CRA investigations resulted in forty-four convictions, collection of about $7 million in unpaid taxes over a six-year period plus an equal amount in fines, which is a bit over (a measly $1 million a year in unpaid taxes). Jail sentences per conviction went up, she claimed.

It was a typical political maneuver. It gave an answer, but not to the question asked. There was no breakdown of offshore accounts or the use of Falciani (HSBC) data.

Before we proceed: Norway and Finland published all tax returns of all taxpayers on a government website. It doesn’t cause any problems in those countries. Nosy neighbors are discouraged because it costs $100 per search.

Although the tax department refused to disclose any data, the CBC pressed on through The Freedom of Information Act. In response, the CRA only disclosed twenty-five names. Nineteen names remain protected behind whatever bureaucratic stalls the government could muster. Why did these nineteen get safeguarded? We’ll never know.

10 Canadians from the tax-haven data leak

However, the CBC had twenty-five names to work with. None of these were on the Lagarde List. On contacting these people, some of the taxpayers were so outraged at the deception by Minister Shea that they revealed the facts of their convictions to the CBC. In one example, the offshore tax evasion was undeclared income from rental properties in the State of Wisconsin.

Another taxpayer was convicted because he did not declare income from a clothing import business in Hong Kong. Every detail reported about his conviction was wrong. His lawyer commented: “One, this was not an offshore conviction. Two, he was not sentenced to 27 months in jail…. Three, he did not receive a $320,000 fine. The information is false.” He did get a fifteen-month conditional sentence, but never saw the inside of a prison. His fine was $107,000. The conviction was real, the fine was exaggerated, and the jail time and the grounds of conviction were completely fictional.

The CBC analysis of the twenty-five cases concluded that only eight were related to offshore tax havens as we, the public, understand that definition. Two of those came from a Québec police investigation into mafia activities. That left six, but from what source?

Tax lawyer David Chodikoff reviewed the data for the CBC and concluded that none were related to the thousands of names leaked from the bank whistle-blowers. My best guess: all those on the leaked lists got delightfully sweet deals under the voluntary disclosure program that are shielded from probing reporters’ eyes. Certainly, the names on the leaked lists didn’t serve any jail time and they likely paid only a compromise amount.

Meanwhile, the leaks continued…

The ICIJ Steps Up To The Plate

In 2011, Rudolph Elmer, a former employee of Swiss Bank Julius Baer, tried using Wikileaks for protection and a means of bringing tax evasion by individuals to public attention. Needless to say, that was not effective. You can read his story here. The ICIJ saw the problem and devised a solution.

The ICIJ (International Consortium of Investigative Journalists) was formed by responsible journalists who knew they could not report on stories of serious issues is employed by the mainstream media. So, they left job security behind and formed an organization dedicated to pursuing stories that conflicted with the interests of the media barons and their billionaire friends.

The ICIJ recognize that there were several issues: protection of the whistle-blowers from governments, forcing the media to give full attention to coverage of tax evasion by individuals (not just corporations), and in consequence forcing the tax departments to investigate, and the justice departments to prosecute, the super-rich tax dodgers.

Thus, the idea that brought forth the Panama Papers was born. The ICIJ would protect the source with the tradition of journalists’ privilege and go to jail themselves rather than reveal the name. The ICIJ would do the investigative work of connecting the dots — names through chains of ownership — so that the public could see the connections for themselves. The well-organized evidence would be leaked to a German newspaper in the knowledge that Germany would not prosecute the journalists.

The organized data would link the names of public figures to tax havens. The stories would be so juicy that if a mainstream newspaper refused to give them full coverage, it would have missed some of the greatest stories of the year. The public would soon be aware of the seriousness of tax evasion and tax departments’ favoritism to the rich.

The Panama Papers proved the goal of the plan’s protection of the whistle-blowers was effective. The dramatic splash forced the mainstream media to give some attention to offshore tax evasion. This success means more whistle-blowers, whether hackers or bank employees with conscience, can safely leak in the future. The banks can no longer distract with name-calling. Politicians will face increasing difficulty protecting their big campaign donors.

But there are battles still to be fought.

The first of the next battles is to shift the focus away from leaders of foreign countries onto ultra-high net worth individuals (UHNWIs) whose names appear on the leaks. The IRS will not investigate them. Cleaning up that department, and all tax departments is the key to stopping offshore tax evasion by big political donors.

US citizens depend upon the collaboration of the IRS to investigate, and the DOJ to prosecute tax evaders. In the next installment of the series, we’ll explore why the IRS rarely investigates ultra high net worth individuals (UNHWIs), the methods available to soften the blow when investigation is unavoidable, and what we can do about rampant tax evasion by the 1%.

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