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The secret world of tax havens

An anonymous source has provided extensive insights into a worldwide network of tax evaders. Media in more than 30 countries are currently sifting through a mountain of data.

260 gigabytes of documents - that's the printed equivalent of 500,000 copies of the Bible. This is the massive amount of data that was passed on more than a year ago by an anonymous whistleblower to the International Consortium for Investigative Journalism (ICIJ) in Washington. More than two million emails and other confidential documents sketch a picture of a dubious shadow world. More than 130,000 people from 170 countries are alleged to have secreted their money in tax havens. Analyzing the data is a mammoth task that is still nowhere near completion.

Challenge for computer forensics experts

The anonymous source secretly lifted the data from two company servers and transferred it via the Internet. "Unfortunately, in order to protect the source, it's not possible to say anything more about exactly how this was done, but it's clear that there was a substantial leak," says German data journalist Sebastian Mondial, who is one of those analyzing the material. This means that at a certain point these companies' secrets were accessible in such a way that someone was able to make a copy, Mondial explained in an interview with DW.

Germany's Süddeutsche Zeitung daily writes that much of the data was not very well organized, and that some of the documents first had to be converted so they could be read by machine. "We were lucky that we had some specific forensic software that's usually used by criminologists," says Mondial. This, he explains, made it possible to scan these databases and examine them to find out things like what connections existed between pieces of data, when documents were created, when emails were sent and who received blind copies of emails.

Virgin Islands beach (photo: Jost Van Dyke)

The Virgin Islands are just one of many tax havens

Havens of tranquility and tax evasion

The British Virgin Islands, the Cook Islands, the Seychelles, Panama: All of them have something very attractive to offer to certain companies and private individuals - anonymity. "'Come to us and you won't have to worry about the tax office finding out.' This is the kind of slogan these so-called offshore islands use to attract rich people," says Thomas Eigenthaler from the German financial managers' union (DSTG). He explains that the tax evasion is made easier by the fact that the taxpayers don't have to deal with it themselves. A whole industry has sprung up to advise them and offer tailor-made solutions. Sebastian Mondial adds that many tax havens don't even keep any kind of register with information on company owners or capital.

The EU estimates that every year around a trillion euros in tax revenue is lost through tax evasion or tax avoidance. According to a study by the non-governmental organization Tax Justice Network, a fortune estimated at between 21 to 32 trillion dollars is stashed away in tax havens. By comparison, in 2011 the gross domestic product of the United States was around 15.1 trillion dollars. The figure doesn't even include non-financial assets and gold held abroad, foreign properties, or luxury yachts sailing under foreign flags.

"According to my colleagues working on the project, there's a particularly clever trick they pull when someone is sued by an offshore company. They agree on a settlement, and the complaint is dropped," explains Sebastian Mondial. Then the settlement money, which, as part of a lawsuit, does not have to be taxed, is transferred to the offshore account.

There are other tricks, too. For example, a company can set up a subsidiary in a tax haven to deal with its foreign operations, thereby avoiding paying tax on foreign profits.

Letter box

Offshore firms often are little more than a letter box

Is Germany also a tax haven?

Private individuals resident in Germany have to pay tax of up to 45 percent on their earnings. Companies whose main office is in Germany have to pay corporate tax and business tax. But in Germany too there are loopholes that the cunning can take advantage of.

"If a German-based business seeks advice from an offshore company, the offshore company issues an invoice, and the money is transferred. To the tax office, this looks like a perfectly normal transaction," says Mondial. However, it means that the money has been moved out of the country, and no further taxes will be paid on it. According to German law the burden of proof lies with the tax office, not with the companies.

And this burden is too heavy for the German system to bear, Eigenthaler says: "We don't have the capacity to do all the checks. Sometimes we wait years for an answer from overseas authorities. But there's also a lack of political will. I always have the sense that people at the top are being too lax in their pursuit of tax evaders."

Furthermore, the influence of the German state ends at the border. "If money is transferred out of Germany to another country, the German treasury has no way of locating it - unless Germany has a tax agreement with the relevant state that includes the exchange of information," Eigenthaler explains. But why would somewhere like the Cayman Islands have an interest in torpedoing its own business model by signing such an agreement? And as Eigenthaler points out, even if an agreement were reached, it doesn't mean it would necessarily be followed to the letter.

The data leak and its consequences

For years now international organizations like the OECD (Organization for Economic Cooperation and Development) have been trying to establish measures against tax fraud and standardize regulations. According to the OECD, progress has been made since a blacklist was published in 2009 naming four countries as tax havens. 700 agreements were reached regarding the exchange of information, and around 40 judicial verdicts have led to some changes in the law.

Might the revelations contained in these databases be of assistance in the international fight against tax fraudsters? Yes, but only indirectly, according to the computer forensics journalist Sebastian Mondial. He says he hopes that the actual data will never be published. The point of the exercise is not simply to put all of these firms' data on the Internet and let everyone look at it to see who has transferred how much money, or who owns which companies. Rather, says Mondial, "The lawmakers and the respective countries must somehow find a way of establishing transparency."

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