In February, the world watched as one of the biggest offshore financial centres was investigated for fraud. Simon Hildrey analyses how this investigation came to happen and what the future holds for wealthy families who want to keep their assets secret and safe
A shiver must have gone down the spine of most wealthy families when it was announced in February that a former employee of Liechtenstein-based LGT Bank had sold a DVD containing data on private bank accounts and foundations. LGT Bank is owned by the Princely House of Liechtenstein and Prince Alois (pictured), has taken over Head of State duties from his father.
The informant is said to have sold data on 1,400 clients to the German foreign intelligence service for €4.2 million. There are reports that the German authorities have subsequently gained possession of a further four DVDs of client information.
Germany has since won the support of most EU finance ministers in asking the European Commission to accelerate its analysis of how to clamp down on "tax havens". This is likely to occur through extending the EU Savings Tax Directive.
In the UK, HM Revenue & Customs (HMRC) paid for a list of 100 residents with money in Liechtenstein. Other countries said to be investigating residents with accounts and foundations in the Pricipality include Australia, France, Spain and the US.
This is just part of a growing trend over the last 12 months. In April 2007, HMRC launched the Offshore Disclosure Facility – designed to encourage people to notify it of undeclared offshore bank accounts – after it gained details of more than 100,000 account holders following legal rulings that forced five banks to provide names of customers with overseas accounts.
In the US, presidential candidate Barack Obama was one of the senators to propose the Stop Tax Haven Abuse Act in February 2007. Another senator, Carl Levin, said: "Recent events involving a bank in Liechtenstein once again demonstrate the problems presented by secrecy jurisdictions and tax havens that enable individuals to hide assets and evade taxes."
All these developments show we are living in an age of increased transparency, with governments targeting offshore centres in what they say is a crackdown on tax evasion. It is argued that if wealthy families have paid their taxes and provided the required information to the authorities then they should not have anything to worry about. Not everyone agrees.
"Why should someone tell the government about what is in their bank account if they pay their tax?" asks Edward Reed, partner of law firm Macfarlanes. "So it is with offshore holdings. There are plenty of reasons why clients want confidentiality."
Simon Paul, director of multi-family office Sand Aire, says the UK government has already shown the ease with which confidential information can go missing. "There is greater demand from HMRC to provide information, and HMRC has the power to get information on income and capital gains from banks," says Paul. "This power is evolving every year and tax authorities will increasingly get greater access to information."
But while UK families may be planning for this eventuality, others may not be so well prepared. "Wealthy families in continental Europe may have been surprised by information about clients of a Liechtenstein bank being passed to foreign authorities," says Chris Wyllie, a partner at Iveagh, investment managers for several members of the Guinness family.
In particular, these latest developments could pose a threat to Switzerland, which markets itself on its banking secrecy. It could also increase the attractiveness of the Channel Islands. "It looks as if there is a level playing field between the Channel Islands and Liechtenstein following these revelations," says Wyllie.
What can families do to ensure confidentiality? The bad news, says Charles Gothard, an international tax and trusts partner a Speechly Bircham law firm, is that "no one can offer cast iron guarantees about the confidentiality of information about their finances".
However, Konrad Friedlander, partner of law firm Carey Olsen, says offshore centres do provide some comfort. For example, most offshore jurisdictions have signed tax information agreements with other countries, which means the authorities have to go through the appropriate judicial proceedings to prove there are sufficient suspicions that the client has committed a criminal offence such as money laundering or tax evasion. "These agreements generally mean tax authorities cannot simply turn up in a jurisdiction and ask for information about a client," says Friedlander.
Nevertheless, wealthy families have to accept there is no absolute confidentiality. The key is to consider carefully where you live and in which jurisdictions you hold your assets. As Friedlander points out, the reporting requirements vary from one country to the next. Some lawyers also suggest families should consider holding their wealth in Asian jurisdictions.