In our article Are Tax Havens Inherently Bad?, we briefly discussed some of the legitimate uses of tax havens and the ethical justifications for their existence. A tax haven with strict secrecy laws can serve as a safeguard of individual rights against an abusive or unstable state. This came to the forefront in Europe during the post-World War 1 era, when the Nazi party began its campaign of discrimination against “Jews and other enemies of the state.”
Switzerland had already begun to acquire a reputation as a tax haven for wealthy European capitalists making their fortunes during Europe’s recovery from the First World War. Some of this reputation goes centuries back to the Middle Ages, where stubborn Swiss freemen with their deadly pike formations proved highly resistant to the constant shifting of borders engendered by Europe’s ambitious royal houses. However, the industrial age made reliable banks truly indispensable, as monetary wealth eclipsed the importance of tangible assets like land ownership. The massive amount of death and destruction of the Great War also served to hasten the rise of aspiring capitalists. Thus, the stage was set for Switzerland to become center of the financial world.
Industrialists were not the only members of society becoming wealthy at this time: politicians, newspaper owners, judges, and other public figures found themselves making large fortunes in kickbacks from the capitalists (such as those in the defense industry, especially as Europe’s arms race and military buildup began in earnest.) Increasingly, these wealthy men chose to stash their earnings in Swiss banks, to avoid paying taxes during an era when progressive income taxation was becoming the method of choice for funding governments. In disgust at this practice, a member of the French Parliament launched a public scandal by listing the names of prominent French citizens who were hiding their fortunes in Swiss banks. He derided his Frenchman as un-patriotic and stated that they “probably are unaware that the money they deposit abroad is lent by Switzerland to Germany.” While the French politician’s push for banking reform succeeded in creating political pressure for reforming Swiss banking laws, it did not, by any stretch of the imagination, have the intended effect of increasing transparency. Rather, the changes it prompted would ultimately cement Switzerland’s reputation as a tax haven, turning a de facto practice into a de jure one.
The law, entitled the Federal Act on Banks and Savings Banks (now usually referred to as the Banking Law of 1934), pushed forward through the Swiss legislature. However, during this period the German Nazi party began to publicly and privately press the Swiss courts and banks to turn over information on the accounts of Germany’s Jewish citizens. In addition to padding the pockets of party officials, seizing or freezing the accounts (or threat thereof) was a pre-emptive move by Nazi authorities to prevent Jews from fleeing Germany en masse. These actions provoked major backlash across Europe- Germany was not the only state undergoing (or fighting to prevent) regime change. Both the burgeoning class of wealthy industrialists, as well as old aristocracy, had reason to fear that their family fortunes, sometimes acquired over many generations, could disappear if radical socialist or fascist groups seized the reins of government. This well-founded fear resulted in an amendment to the law, Article 47(b), which essentially codified secrecy in Swiss banking.
The law prescribed stiff criminal penalties for violations, and prevented banks from giving up information on accounts and their owners to any third party, including foreign governments and their tax enforcers. Swiss judges could issue subpoenas forcing disclosure in severe criminal cases, but prior to 2012 when the secrecy laws were amended after enormous pressure from the United States Justice Department and the OECD, these subpoenas were usually seen only in cases of the laundering of drug money or financing of terrorism, crimes which have an immediate and compelling interest to the entire international community.
As we have mentioned in previous articles on tax havens, it is incredibly difficult to build a criminal case to bring to a judge without access to financial records. The burden of proof to begin the investigation is incredibly high, and therefore (prior to 2012) made chasing the money nigh-impossible. Furthermore, the Banking Law of 1934 did not recognize tax evasion, such as the under-reporting of assets, as a criminal act worthy of subpoena. In effect, Swiss banking threw its arms open to tax evaders and quickly became the world’s tax haven.
Initially, the law proved beneficial to some Jewish citizens. Even German employees of Swiss banks could not disclose account information to the Nazis, and this allowed some Jews to escape to other countries with at least part of their assets intact, or to use their assets to cover the expenses of their escape and emigration. However, some Jewish citizens who were unable to escape Germany and became victims of the Holocaust, as well as their family and descendants, were later victimized again by the same Swiss banking law when they attempted to reclaim their assets after World War II. Numerous European Jews perished in concentration camps and their assets went unclaimed. Sometimes Nazi officials were able to compel them to withdraw their Swiss assets which were then seized by officers of the regime. Sometimes documents were simply lost in the chaos and destruction of the Second World War.
After decades of accusations, investigations and political pressure, a Swiss commission attempted to identify Jewish assets lost during the Holocaust and return them to their rightful owners. Naturally, there was significant suspicion about conflict of interest as Swiss banks could have benefitted from substantial sums of unclaimed assets (plus decades of interest), by conveniently losing documents and taking ownership of assets. Eventually the Volcker Commission inquiry reported about $100 million worth of dormant assets from WWII, of which about one quarter is believed to belong to Holocaust victims. An independent investigation by international scholars largely supported the Volcker Commissions’ findings, which essentially acquitted the Swiss banking industry, agreeing that while there were isolated instances of malfeasance by individual banks and persons, there was no systematic effort to steal the lost assets.
This ugly episode in history provides an interesting glimpse into the benefits and pitfalls of tax havens: while financial secrecy can provide an important safeguard against abuse by corrupt or unstable governments, they also foster an inherent atmosphere of mistrust of the financial system. While recent events have brought into question just how politically neutral the IRS is, in general the US government is stable and respectful of the property rights of its citizens. It is difficult to accept that many US citizens and corporations have a compelling need to stash their fortunes beyond the reach of the IRS or American courts. In an age where many citizens are rightfully concerned about fraud and abuse, and massive frauds are being discovered on a regular basis, tax havens largely undermine people’s confidence in the world of international finance. When banks routinely flout domestic laws and regulators, who would expect them to play by the rules in the massive financial world hiding offshore?
Whistleblower Justice Network Can Help You
Whistleblower Justice Network partners with whistleblowers worldwide to expose large, institutionalized tax fraud. Utilizing whistleblower programs, including the IRS Whistleblower Program, the SEC Whistleblower Program, and the False Claims Act, we aid whistleblowers in bringing tax cheats to justice.
If you have meaningful information regarding a tax haven or related tax scheme that you believe is illegal, robbing the United State of America of taxes it is owed, Whistleblower Justice Network can help. Working alongside world-class legal counsel, we will ensure you are protected to the fullest extent of the law and that you receive credit for the information you bring to the U.S. government. Partnering with whistleblowers is all we do. Visit us at www.whistleblowerjustice.net, or call us at 844-WJN-4ALL, to learn if we can help you.