The Proven Role of Intermediaries in Tax Evasion

A taxpayer who wants to voluntarily carry out his own tax evasion must be very competent or resort to fitters. The “fitters” who must be used to evade tax form a diverse, plural galaxy that includes both financial intermediaries and the professions of law and numbers. In this regard, focusing on banks the questions that arise about the financial world is a mistake, because banks are only a small part of a larger network of complicity in which there are law firms, accounting firms, and financial advisors. However, tax optimization schemes use their various skills. They are indeed accomplices: you cannot set up a trust without a lawyer, an accountant, a banker, and a tax haven.

It is also, and more difficult, to look at financial products. The complexity of special purpose vehicles used for legal but immoral tax optimization operations removes them from the watchdogs of regulators. Among the key players in tax evasion are the “nominees,” or nominees. Companies, for example, based in Jersey, specialize in the recruitment of nominees: these people agree to be registered on the register of commerce as a shareholder of a shell company. At the same time, they sign a contract with the true economic beneficiary of the transaction by which they agree to waive all rights normally stolen from a shareholder. For example, some “nominees” would be installed in California. It is a “service delivery” whose terms of remuneration are set by the company that connects the real economic beneficiary with the nominee.

Whatever the number and nature of the actors involved in a process of tax evasion, there is one that plays an essential role: it is the banks. Indeed, they remain the place to deposit or transfer funds exempted from tax. Tax evasion is organized around them even if they can occupy this place to their defending body. Indeed, in many cases, these arrangements enter the official economic circuit through financial actors. However, they do not have a monopoly, as some legal actors also play a very important role, but it is rare that a transaction does not, at some point, end up in a financial player.

In common parlance, we are talking about banks. Instead, let’s use the term “financial sphere.” Insurers should not be forgotten. It is part of basic economic activity, but tax evasion can be done through insurance, as well as through banks. It must be said that a credit institution can involuntarily participate in a tax evasion operation. The diligence that are asked of a bank, which consists of knowing its customers, goes so far as to have to probe the kidneys and hearts on the tax motivation of a particular operation. Because any optimization or tax evasion operation through a credit institution doesn’t necessarily involve that he had a complete knowledge of the fact that it was tax evasion. There are, of course, cases where the institution knew and further encouraged fraud, but this is not always the case.

Banks play a central role: an investor, who makes an investment in an exotic country, is reassured if the management of the account is entrusted to a large international institution. The big banks, in fact, do not open accounts blindly, but demand a lot of information, beyond the legal requirements, probably to guard against the evolution of the legislation. The banking system is the heart of a wider system around which law firms, notaries, and financial advisors are articulated. All are working together to ensure that a real tax evasion industry exists at the sendee of both businesses and physical personalities. There is no break between the so-called real economy and financial activity. The link is historical and organizational. Banks are now just one instrument in the fraudster’s palette.

By definition, tax evaders break free from borders. You have to be aware of the world we live in. You transfer money to Singapore in two minutes; you no longer need cash. Between dematerialization, the freedom of movement of people and capital, there is no longer exchange control; this evolution of societies is exponential in recent years. Tax evasion processes not only affect the freedom of movement of capital, but also of people at the international level, while investigative services (tax or judicial) remain particularly constrained by the principle of territoriality of national rales.

The fixtures, therefore, aim to create opacity through multiple structures, each established in a different state or jurisdiction. The “offshore leaks” has uncovered some of the most conventionally used fixtures. The top banks are operating that way. Customers wishing to go through a local bank went to a subsidiaiy, in Jersey or Asia; the bank then used a financial services provider specializing in the creation of quick companies, Portcullis Trust Net or Commonwealth Trust Limited. Local banks are supposed to verify that the final link is not domiciled. The files show several montages offshores companies from banking subsidiaries in Jersey, Singapore, the Virgin Islands, Samoa, Seychelles, or Hong Kong. In concrete terms, the local bank Jersey Trust Corporation Limited was a service provider for Triple 888 Fortune Limited, an offshore company based in the British Virgin Islands, whose fictitious directors are domiciled in Jersey, to the Virgin Islands, and the Caymans. Among its shareholders, UBS Nominees Limited, based in Jersey in short, an opaque assembly ultimate.

It should be noted that there is no place of clouding but a fiscal engineering that goes through an account in Switzerland, a company in Panama, an account in Singapore, and so on. This engineering is known to legal practitioners. To counter it, it is necessary to have the international legal tools to ask questions, the tools for taxing these undeclared assets, internally, and coercive tools. Legal interaction leads to extreme opacity. The difficulty is related to the traceability of the structures. Judicial services face the same difficulties in identifying fixtures, structures, and linking them to real economic beneficiaries.

The “business” sections of these banks based abroad, these “private banks” whose “desks” work by geographical area, are not accessible to people who are not introduced into the environment. These sophisticated extreme systems in corporate regulations and legislation anticipate their effects and adapt in advance to investigations they may be subject to. No one, other than those who are veiy familiar with the banking system or tax lawyers, could make such sophisticated arrangements. It is not just a matter of transferring notes to the trunk of a car or opening an account in a bank where you know someone. The authorities are working on very complex schemes, in which the actors operate from Switzerland, in London, to the Bahamas, then Panama, then Cyprus, and these transfers take place in nanoseconds, with offshore companies whose economic beneficiary and bank accounts are not known, which may otherwise be in different countries. It’s a track game designed to lose investigators. The response times to judicial requisitions can then be very long.

To date, there are 850,000 companies in the British Virgin Islands and 120,000 in Seychelles (a six-fold increase in three years). The montages take particularly different forms. The Organisation for Economic Co-Operation and Development has reportedly identified more than 400 fraudulent and non-tax schemes. Companies are more likely to use aggressive tax optimization schemes. The challenge for the tax sendees is then to prove that this arrangement is against the law, either that it is an abuse of law, that it amounts to an abnormal act of management, or that it does not comply with a device so-called “anti-abuse.” For its part, the company will always ensure that it has complied with the legal framework in force.

With regard to international recalls, we can cite five of the most common categories of practices in non-financial areas per se. The use of transfer prices first, for example, a Canadian company, is inadequately charging its services to its foreign subsidiaries or a foreign takeover in Canada is too low-paid. The business restructuring, then, which consists of transferring functions—purchasing, marketing, advertising, and so on—to other entities located in countries with more favorable taxation, usually Switzerland, sometimes Luxembourg. This results in a loss of substance, and therefore taxable profit. Thirdly, companies that own the brands are based in countries with favorable taxation and receive abnormally high royalties from subsidiaries. The fourth category is for certain groups to use entities located in tax havens to be charged for benefits or financial transactions. Finally, in the field of the digital economy, companies deny the reality of an activity in Canada. No professional sector is completely immune to these practices, but fortunately, not all companies in these sectors give in.

As for financial arrangements, they always have the same purpose: to increase local financial burdens and to ensure that the corresponding product is not taxable. We lose and the other country in which the product is collected does not gain anything, only the company benefits. Five types of processes are used. Artificial indebtedness, first: financial reserves are distributed in another countiy and then lent to the local company in the form of bonds repayable in shares, for example. The money does not actually come out of the company, the shareholding is not changed, but the financial burdens increase.

Other products, called Repurchase agreement operations, consist of a loan to an American or English subsidiary, which pledges securities whose dividends replace the interest payable. These would have been taxable, while the dividends, between daughter-company and parent-company, are exempt and do not wish to be declared locally. For individuals, the subtraction of the tax can take the form of an exile, that is, a physical displacement of the person, such as in Switzerland or Belgium. Optimization practices may also take place, but international schemes are, more often than not, tax evasion, that is, a tax-sanctioned and criminally sanctioned act. It is not only a question of reducing income tax but also the income tax, by failing to declare assets held abroad.

It is easy to identify the range of technical solutions devised by banks serving international customers. These tools help clients to legally optimize their taxation, or sometimes to set up a tax exile, up to the most sophisticated fraud as it is discovered today. All foreign banks have similar practices. Both heritage engineering and structures and teams for tax evasion are located in a pan of countries. Today, Switzerland retains professionals who think about international solutions, but these are particularly implemented in the Middle East and Hong Kong, which hosts most of the great fortunes. Switzerland cannot afford to risk the exports of its major industrialists. The money is sent further, and the structures are sophisticated via trusts. It is an instrument of Anglo-Saxon law that originally concerns family protection, the preservation of assets or the management of pension funds. Tax lawyers in Paris and London have turned him away from these laudable and lawful grounds.

The trust is now much less used. Luxembourg life insurance is the only way to open an account with a Swiss bank without the actual holders being listed in the account opening documents as economic rights holders. Some countries have applied international legislation on real estate investment. When you buy a property through a foreign law structure, the intelligence and action service against clandestine financial circuits gives you two to reveal who is behind this structure or to pay 3% of the market value of the property per year. When you use a life insurance policy that is a local company or a company whose parent company is listed on a local market, you have the right to acquire the immobile property (link through the foreign intermediary structure with the life insurance company as a counterpart). The local administrative authority is satisfied with this and accepts that the life insurance company be designated as having an economic right. This is widely used. Most of the very large reinvestment structures of undeclared money are done through Luxembourg’s life insurance structures.

The other major technique for reinvesting undeclared capital is Lombard lending. If a client wishes to acquire a property with undeclared money placed in Switzerland, he applies for a loan from a bank that is guaranteed by a mortgage on the property question in question. The real guarantee is off-book. It is given by the Swiss subsidiary to its Parisian parent company, in a parallel contract and accounting. Banks are the first players in the described system. They have developed heritage engineering teams within them that follow these issues veiy precisely. At heritage engineering or family office conferences organized by local or foreign companies, one of the first remarks concerns the absence of representatives of the intelligence and action against clandestine financial circuits and the freedom of speech that results from them. They will seek added value from the major law firms and bring together all the necessaiy professionals.

New asset classes, beyond the financial markets, are now very favorable, such as furniture or art. Banks have opened “art” departments out of interest, because this market allows for larger-scale and less regulated fraud. Moreover, works of art do not fall into the basis of calculating wealth tax in many countries. Banks have a strong presence in this market. One of the main sponsors of the Basel art fair is UBS. It is possible to unquestionably establish the need to rely on a bank and, more often than not, one of the largest international institutions, to engage in tax evasion practices. It is more difficult to determine the exact nature of the links between the bank and its client, as it appeared that banks could both be active accomplices of tax evaders or act in ignorance of the intention of these. It is also possible that some institutions, failing to take an active part in tax evasion, know how to “turn their heads.”

The role of tax authorities poses a simple question: Do tax intermediaries allow better compliance with the law through expertise, or do they facilitate its circumvention? While the two realities can, of course, co-exist, the question of the complacency of intermediaries with regard to tax evasion, if not their full complicity, is fully raised. A cluster of three clues suggesting a fairly widespread complicity of intermediaries in the processes leading to tax evasion: some intermediaries actively canvass potential clients who wish to escape tax; some intermediaries protect their clients' secrets, even if they are subject to illegal transactions; and some intermediaries legally offer tools to discreetly switch to tax illegality.

In the light of the information gathered, it appears that some intermediaries have embarked on an active process of recruiting wealthy clients who want to hide their assets. This proactive canvassing must be distinguished from the simple advice on tax optimization, which is, for its part, fully part of the profession of a banker or lawyer. Of course, it is a matter of explaining to the customers the comparative benefits of a savings book and life insurance based on their circumstances; of course, their role is to advise business leaders on the tax aspects of the transfer of their business.

Canvassing, on the other hand, is more active. However, it appears that the canvassing methods used by intermediaries are sometimes at odds with the legislation. Thus, it is no longer only the question of the legal or illegal origin of the assets that is asked, but that of the means used to manage them. An example is the indictment of some banks for illegal delisting, while their local subsidiaries are indicted for complicity in illegal soliciting. These cases, known as the “milk notebooks,” have highlighted the fate of “businessmen” sent to certain countries outside the applicable legal framework, in order to encourage wealthy clients in these countries to open an undeclared account in Geneva, Basel, Zurich, or Lausanne.

In order to circumvent the ban on cross-border canvassing without authorization, the advisors allegedly used empty computers, with access to the bank’s system hidden behind the “Solitaire” icon. The contracts, sometimes signed locally, would have been sent to Switzerland by mail. The vast majority of clients would not have declared their assets in Switzerland. The bank, on the other hand, would not have wanted to know more: out of discretion as well as out of interest, the Swiss managers did not ask questions. Above all, nothing should be asked, because if the client said that the money was not declared, the money could no longer be accepted. The accounts were then allegedly opened under pseudonyms, the real identity of which would have been recorded on simple Bristol cards in wooden boxes. The so-called “milk books” would have been used to calculate the distribution of bonuses among business managers.

In order to create an environment conducive to canvassing, a bank would also have organized, in several countries, worldly events—sports, artistic, or musical—where customers could meet potential and business managers. For example, of the 20 guests at a tournament, 10 were already customers of the bank and the other 10 were potential customers, or “prospects.” One of them would obviously have been convinced on the green, since he deposited $38 million in a new account. In total, the tournament would have allowed the bank to be entrusted with the $40.5 million amount—a climb that is well worth the $20,000 cost of renting an 18-course holes.

These examples show that some banks have put in place a genuine organized system of assistance to tax evasion, of which they were perfectly aware. The banks deny these allegations and say they do not tolerate any activity to help customers evade their tax obligations. However, these well-known practices in the sector are neither isolated nor anecdotal and are unfairly competitive to the detriment of institutions that prohibit themselves from such acts.

Many of these bankers, advisers, and “repentant” businessmen now say they are speaking out against the “hypocrisy” of banks, or even “the falsehood of a system since 1934.” While this attitude is to be welcomed, one can still wonder about the sudden reversals of some councillors, after many years of peaceful practice of their profession. What were their motivations then?

Far beyond the strength of conviction of the canvassers, the best incentive remains the guarantee, for the customer, whose information will remain secret. While the importance of secrecy is a characteristic shared by all intermediaries offering tax-related sendees, nowhere is its importance as pervasive as in the hushed united of wealth managers and others family offices. Here, a point of rowdy communication or compromising advances toward customers: word of mouth plays the key role. In this unlike the big banks, which have extremely large sales networks; for individuals, the tax optimization of a wealth is often a matter of personal relationships.

The secret of the relationship is, of course, followed by the secrecy of the operations carried out and the services rendered. The protection of secrecy is not only a commitment in principle of the provider toward his client: it is also and above all a legal obligation, that of professional secrecy. The professional secrecy prohibits “disclosure of information of a secret nature by a person who is a custodian either by state or profession, or because of a function.” In the field of intermediaries, professional secrecy has particular variations. Lawyers are, thus, subject to solicitorclient privilege under their ethics.

Professional secrecy, of course, has exceptions and derogates, which are limited to being listed: it is subject in particular to the right of communication of the intelligence and action service, which could exercise this with third parties (lawyers, notaries, financial institutions, etc.). Nor can professional secrecy be opposed to the judicial authority in the context of criminal proceedings. However, this lifting of solicitor-client privilege applies only in the event of an express request from the intelligence and action sendee against clandestine financial circuits or the authority judicial system in cases where the law imposes or authorizes the disclosure of the secret.

This protection of secrecy is no longer applicable as long as intermediaries are aware of a possible tax evasion. Of course, not all are subjectto the Code of Criminal Procedure, which obliges any public official to inform the public prosecutor of an offence of which he is said to have acquired knowledge. However, financial institutions and professionals in numbers and law are subject to a reporting obligation in the event of a tax evasion. If banks comply, to some extent, with this obligation, does the small number of statements made by lawyers mean that they do not know when a transaction is a tax evasion, or rather they don’t want to know? It is more of a voluntary ignorance.

In fact, a client’s relationship with his intermediary goes beyond trust and discretion. Secrecy is only one of the advantages of the services offered, which are truly characterized by their high-end character, in terms of the quality of the services as well as the availability of advisors. When a new customer arrives, usually recommended by another customer, he has always offered him the manager’s mobile number, so that he can call at the time that suits him. But “tailor-made,” if it is a perfectly legitimate high-end positioning, may also imply the possibility of less-orthodox services. This is the case with fees correlated to the tax gain of a particular scheme: while lawyers are usually paid by the hour according to a pre-defined scale, some propose conditional fees directly related to the amount, “optimized.” The perverse effects of such an incentive are easy to see.

The permissiveness of intermediaries with respect to transactions of questionable legality naturally raises the question of the reputational risk incurred by the profession. This question arises in quite different terms for large banks and for small structures such as specialized private banks or wealth managers. In the first case, they are large, regulated, controlled, and observed financial institutions that depend on their good reputation for multiple activities. In the second case, however, it is not unnecessary for potential customers, who are informed by word of mouth, to know what services they can actually expect.

Beyond the issues of canvassing and stricto sensu confidentiality, it is necessary to point out how easy it is to access sendees that enable tax evasion. Some were able to open an account at Lichtenstein in a matter of minutes for $1000. The following scenario is often proposed: the children of an American company executive, paid in Jersey, had to inherit and wanted not to pay too much tax. According to our research, a very quick response is often given, often advising not to put this money locally, or risk being overtaxed. Liechtenstein, a much safer countiy, is often advised by managers. It is, therefore, not necessary to travel, or even, sometimes, to have direct contact with an advisor. For example, some websites have made a specialty of creating companies and bank accounts directly online in a tax haven. Communication is edifying: the emphasis is on the confidentiality, speed, and ease of registration of an offshore company or linked accounts, at very moderate prices. Confidentiality is guaranteed by enhanced security measures: the website is encrypted, the physical infrastructure is secure, and the customer database “is neither printable nor can be copied, nor is it exportable. As a result, no sensitive data or customer information can come out of our offices.” Complementary services include the opening of a virtual office (in Geneva or London), the creation of a company logo and business card, or a “designated director” or “designated shareholder” service, explicitly designed to conceal the real manager or owner of the company. This type of communication is simply an incentive to tax evasion and evasion. However, the legal characterization of incitement to tax evasion does not exist in the majority of positive rights, and prosecutions on the basis of complicity in tax evasion only imperfectly cover these practices: therefore, this lack must be filled.