moneyland switzerland
BREAKING SWITZERLAND
In early 2007, two Washington attorneys got in touch with the Department of Justice to offer them a case. They had a client, they said, who wished to remain anonymous, but who could expose tax-dodging and rule-breaking by thousands of America’s wealthiest people, all arranged by one of the world’s most powerful financial institutions. Bradley Birkenfeld had walked into the office of the attorneys, Paul Hector and Rick Moran, almost a year earlier and told them he had ‘inside information on a worldwide conspiracy’, which he wanted them to take to the DoJ, and the attorneys had spent months collating it. ‘We’re telling you,’ they wrote to DoJ prosecutor Karen Kelly, ‘this is a once-in-a-lifetime case.’
Birkenfeld wanted immunity from prosecution in return for telling federal prosecutors everything he knew, but he didn’t get it. Quite the reverse, in fact. Although he sat in long meetings with them over the summer of 2007, and shared documents and memories, the DoJ prosecutors felt he was holding out on them. In May 2008, he was arrested on arrival in his home town of Boston and charged with Conspiracy to Defraud; a month later, he pleaded guilty, and faced a sentence of five years in prison. The statement of facts published alongside his guilty plea is a remarkable insight into the lengths that private bankers like him would go to in their quest to help their clients keep their cash out of the government’s clutches.
Birkenfeld admitted to having advised his clients to ‘place cash and valuables in Swiss safety deposit boxes; purchase jewels, artwork and luxury items using the funds in their Swiss bank account while overseas; misrepresent the receipt of funds from the Swiss bank account in the United States as loans from the Swiss bank; destroy all off-shore banking records existing in the United States; and utilise Swiss bank credit cards that they claimed could not be discovered by United States authorities’. In one instance, which caught the imagination of journalists covering the case, Birkenfeld admitted to having bought diamonds on behalf of an American client, stashed them into a toothpaste tube, and smuggled them into the United States so his client could enjoy his wealth without the Internal Revenue Service (IRS) knowing. It was like the old Goldfinger scam from the 1960s, but better: why go to the trouble of attaching heavy plates of gold to a customised Rolls-Royce that James Bond can follow all the way to Switzerland, when you can stash millions of dollars-worth of diamonds in your sponge bag?
Birkenfeld later published a book about his experiences, Lucifer’s Banker, which makes clear that the revelations in the statement of facts were barely the start of what he’d got up to. He described how he had stalked rich Americans at yacht regattas, motor sports events, classical music recitals, art galleries, and then pitched for their money over vintage brandies with a straightforward boast. ‘What I can do for you is zero,’ he’d say, enjoying their surprise, before going in for the kill. ‘Actually, it’s three zeros. Zero income tax, zero capital gains tax, and zero inheritance tax.’
When they flew out to see him in Geneva, he’d take them to a top-class restaurant, then a strip bar, where he’d pay for their prostitutes. That would get them in the right frame of mind for business, so the next morning he’d escort them to the bank where they would sign over their money. And every dollar that he brought in – all of the Net New Money, as the bank called it – would inflate his bonus, which he spent on enjoying himself. ‘Maybe it wasn’t so special, unless you’re partial to magnums of Laurent-Perrier champagne, fresh beluga caviar, or boxes of Churchill cigars just flown in from Havana. I guess it was nice if you like Frigor Swiss chocolates, Audemars Piguet watches, Brioni suits, and gorgeous girls who care only about pleasing you and having a great time,’ he wrote with inch-thick sarcasm in his memoir. ‘I’d perfected my game, flying first-class all over the world, staying in five-star resort hotels, and seducing scores of one-percenters into stashing their fortunes in Swiss numbered accounts, no questions asked.’
The prosecutors denied Birkenfeld immunity because, they said, he had tried to shield himself from prosecution, and had not been entirely candid with them. They accused him in particular of covering up his relationship with the billionaire Igor Olenicoff, a long-term client of his who had hidden $200 million in secret Swiss accounts, which were supposedly owned by a Bahamas shell company, rather than by the property developer, with the details obscured by corporate structures in Denmark and Liechtenstein. ‘We cannot have people, US citizens, engage in that kind of fraud scheme come back here and put half the leg in the door,’ prosecutor Kevin Downing told the judge at Birkenfeld’s sentencing hearing.
He had a point. You have to earn immunity from prosecution, by giving up everything you know, which is why the judge jailed Birkenfeld for forty months. But it’s true also that if anyone was going to be cut a little bit of slack, it should have been Birkenfeld. The banker didn’t just manage to incriminate himself when he came to reveal his conspiracy in Washington, he provided a priceless and unprecedented window into the heart of Swiss banking, the inner sanctum of Moneyland. And that changed the world, as Downing – perhaps a little reluctantly – conceded. ‘Without Mr Birkenfeld walking into the door of the Department of Justice in the summer of 2007, I doubt as of today that this massive fraud scheme would have been discovered,’ the prosecutor admitted. ‘That investigation now has resulted in not only changing the way in which we obtain foreign evidence from banks in Switzerland, it has caused the Swiss government to come and enter into new tax treaties with the United States.’
Few people have done more to strike at the foundations of Moneyland than Bradley Birkenfeld, whose revelations caused a revolution in the way offshore finance works. When he came to Washington, he didn’t just share his information with the Department of Justice, he also took it to the Internal Revenue Service and the Senate’s investigations subcommittee, which published a report on the matter in July 2008. According to the investigators’ conclusions, the US Treasury was losing around $100 billion a year in tax revenues, thanks to offshore schemes of the sort revealed by Birkenfeld. And the report laid out just how Birkenfeld’s employers – the Swiss banking giant UBS – had done it.
The scam was partly a continuation of the hallowed Swiss tradition of ripping off other countries, as enshrined in the banking secrecy laws of 1934, which were originally passed to protect French clients from a government that was trying to maintain its revenue base in the midst of the Great Depression. This was the same secrecy that came to be much loved by Nazi war criminals and other kleptocrats, and then exploited by London’s pioneering offshore bankers. But this was an updated version of the old scam, since it followed an agreement designed to prevent precisely such behaviour. In 2001, Birkenfeld’s former employer UBS agreed to become a Qualified Intermediary (QI), under which it promised either that its American clients would declare all their income from Swiss-held assets, or that the bank would itself withhold tax from that income, and provide it to the Treasury if the clients refused to do so. The essence of the deal was that the Swiss banks could keep their secrecy as long as they promised to collect tax on the Treasury’s behalf.
It was an elegant plan, but it had one small flaw: it required the banks to be honest. Quite naturally, therefore, it failed. In fact, not only did it fail, but UBS actively subverted it. While banks from other jurisdictions agreed to close their Swiss private banking operations, UBS aggressively expanded, marketing undeclared accounts to as many rich Americans as it could. The reason is obvious: facilitating tax evasion is extremely lucrative. ‘Undeclared accounts held more assets, brought in more new money, and were more profitable for the bank than the declared accounts,’ the Senate concluded. ‘Soon after it joined the QI programme, UBS helped its US clients structure their Swiss accounts to avoid reporting billions of dollars in assets to the IRS.’
Birkenfeld told the Senate committee how he had been part of a ‘formidable force’ of around seventy private bankers who used to attend UBS-sponsored events like Art Basel in Miami with the goal of picking up wealthy attendees. The bankers quadrupled the amount of US-originated money they held between 2004 and 2006, and were looking to quadruple it again in 2007. ‘You might go to sporting events. You might go to car shows, wine tastings. You might deal with real estate agents. You might deal with attorneys,’ Birkenfeld told the subcommittee. ‘It’s really where do the rich people hang out, go and talk to them.’
When asked why someone would want a bank account in Switzerland, Birkenfeld’s reply was blunt: ‘tax evasion. And … people always like the idea that they could hide some from their spouse or maybe a business partner or what have you.’
Unsurprisingly, the Department of Justice did not react well when it heard quite how methodically UBS has been abusing its trust. In July 2008, the US government demanded that the Swiss banking giant hand over the names of all of its US account holders, something that would destroy the Swiss tradition of banking secrecy. In normal times, UBS would have ignored the demand, or obfuscated, or come up with some work-around like the QI deal which would end up giving it new earnings opportunities. But this was during the depths of the banking crisis. By the end of October that year UBS would have offloaded $60 billion-worth of toxic assets on to the Swiss banking regulator, and written down $49 billion-worth of losses linked to the US mortgage market. Its shares had lost two-thirds of their value, and there was speculation over whether it could survive as a bank at all. It simply did not have the ammunition for a battle with the US government, on top of its life-or-death struggle with the financial markets. So it started handing over its clients’ data. It was a first crack in the mighty fortress of Swiss banking secrecy.
In February 2009, UBS came to a Deferred Prosecution Agreement, agreeing to pay $780 million in fines to various US government agencies. It admitted that 17,000 of its 20,000 American private banking clients had used its services to hide assets totalling $20 billion (that’s more than $1 million each), which earned $200 million in revenue for the bank each year. The indictment makes it clear that, while UBS might have looked like a staid buttoned-up banking operation, in reality it ran its private bank like something out of a thriller. ‘Executives, and managers … referred to the United States cross-border business as “toxic waste” because they knew that it was not being conducted in a manner that complied with United States law and the QI agreement,’ the government prosecutors stated. ‘Executives, managers, desk heads, and bankers utilised nominee entities, encrypted laptops, numbered accounts, and other counter surveillance techniques to conceal the identities and offshore assets of United States clients.’
Five years later, UBS’s great rival Credit Suisse (between them, they controlled about half of all the money in Switzerland) admitted to similar charges, though its punishment was far harsher. It had to plead guilty (rather than cop to the more lenient DPA), and pay a fine of $2.6 billion. The prosecution revealed yet more details about what Credit Suisse admitted had been an ‘illegal cross-border banking business’, which had lasted for decades, and which had serviced 22,000 Americans with $10 billion in assets. Half of those assets were controlled by a relatively small number – just 1,234, according to a Senate investigation – of extremely wealthy tax dodgers who hid their identity behind shell companies.
Perhaps the most telling aspect of the prosecution was the revelation that Credit Suisse had initially tried to comply with the QI agreement it signed up to, and even established a new private bank called CSPA with which to do so. The plan never took off, however, because its American clients were not interested. ‘The CSPA initiative ultimately failed as a business, in part due to US clients’ unwillingness to pay a premium for an account in Switzerland if their accounts were declared and tax compliant,’ the statement of facts stated. In other words, the whole point of banking in Switzerland was to dodge taxes; if a client couldn’t do that, she saw no value in the bankers’ exorbitant fees. Credit Suisse would rather break the rules than forgo those fees. Welcome to Moneyland.
It was not all high-tech. Credit Suisse had a branch in Zurich airport, so clients could access banking services without having to trek into the middle of town. Among its services was helping Americans get around the $10,000 limit on bringing cash into the United States, by breaking the total up into smaller packages. UBS was in this game, too. In the prosecution of multi-millionaire UBS client Ernest Vogliano, lawyers revealed that he moved his money from Switzerland to the United States by using travellers’ cheques, which he endorsed in Zurich, then put in the mail to be picked up on his return home to New York. That was not only absurdly low-fi, but also an almost exact copy of the first eurobond scam, all the way back in 1964, except the travellers’ cheques did not even provide any income. They just sat there until he wanted to spend them. If ever proof had been needed that Swiss bankers simply couldn’t be trusted to look after anyone’s interest but their own, the humiliation of Credit Suisse and UBS was it. As Birkenfeld told me during a long chat in a wood-panelled drawing room in his London private members’ club, complete with a vintage car in the lobby, this was just how the Swiss do business.
‘I think what these banks have done historically, and UBS in particular, is they’ve just said, “Fuck you, we’re Switzerland, we’re big, try us,”’ he explained, with a laugh. He’s an extremely affable conversation partner, big and boisterous, with a huge diamond-studded knuckleduster ring on the middle finger of his right hand, but he’s disconcertingly direct as well. ‘Was I part of it? Of course I was. It wasn’t like the janitor’s going to come in and be able to expose this … I will continue to expose it, because they’re still in denial, like an alcoholic that can’t admit they have a drinking problem.’
Incidentally, although Birkenfeld was jailed for helping his clients dodge taxes, he came out on top in other ways. New legislation designed to encourage whistle-blowers earned him a cut of the fine that UBS paid to settle its case. His share came to $104 million. At one conference I attended, he was giving away laminated facsimiles of the government cheque, to be used as bookmarks. The Treasury had deducted tax at source, so the cheque was only for $75,816,958.40, but that’s still enough to set him up for life in the style to which he had been previously accustomed.
Thanks to the UBS revelations, and other related scandals (Wegelin, Switzerland’s oldest bank, was forced to close in 2013 after pleading guilty in a similar case), in 2010 Congress passed the Foreign Account Tax Compliance Act (FATCA), which was like QI but with big sharp teeth. ‘For too long, individuals have taken advantage of the system by hiding money in accounts overseas, while millions of families and small businesses here at home pay the price,’ Treasury Secretary Tim Geithner said at the time.
Under FATCA, if foreign financial institutions declined to reveal the identity and assets of American clients, the government would impose a 30 per cent tax on any investment income received from the United States. It was a pretty compelling offer, particularly when combined with the ongoing criminal investigation into Credit Suisse and other Swiss institutions. Foreign banks could continue to help Americans break the law but, if they did so, they would be cut off from the US market, and under constant threat of a multi-billion-dollar fine. Where the QI scheme had failed, this succeeded. By 2013, five years after Birkenfeld was arrested and the UBS scandal broke, Credit Suisse had closed the accounts of 18,900 of its 22,000 US clients, and their assets had dropped to just $2.6 billion (the exact same amount as the fine it paid to the US government a year later, funnily enough). FATCA came into full operation in 2015. It still has some loopholes, but essentially it has killed the easiest form of tax evasion for Americans.
A 2017 study showed that the number of Americans reporting foreign accounts had risen by a fifth after FATCA entered into force, with an additional $75 billion of wealth disclosed. ‘US banks lost out to foreign banks selling secrecy. It was as simple as that. Then FATCA changed the rules,’ said Elise Bean, formerly the chief counsel at the Senate Permanent Subcommittee on Investigations, and one of the driving forces behind senators’ efforts to expose tax evasion. ‘FATCA has already begun discouraging offshore tax evasion, causing more US taxpayers to disclose their offshore accounts, report their offshore income, and pay the taxes they owe.’
The United States is perhaps the only country which could have done this. Its tax code requires all citizens to file a tax return even if they don’t live in the United States, so Americans can’t easily escape the rule’s provisions by moving abroad. On top of that, the weight of the US economy, and the unique global role of the dollar, has given the government more leverage in standing up to the banks than any other country could have. And where the Americans led, the rest of the world followed. European countries agreed to swap information with each other; and the various British tax havens agreed to exchange data with the UK. All these efforts culminated in 2014 with the Common Reporting Standard (CRS), under which countries agreed to automatically swap information about all the assets that each other’s residents hold in each other’s banks. Previously, countries had exchanged information, but only on request, which meant tax authorities had to know what they were looking for before they looked for it. Now that information flowed automatically, they could cross-check financial data with tax returns and see who was breaking the rules. The agreement threatened to stymie the most potent motivating force behind Moneyland, the fact that law enforcement stopped at national borders, but money did not.
Philip Marcovici, a Swiss lawyer who has counselled the wealthiest people in the world for decades, told me in 2016 that these new international agreements have completely changed the picture for the super-rich. ‘Families have only two choices: play by the rules of your country, or get out of your country. It used to be that there was a lot of abuse, that people could hide money, using bank secrecy, using complicated structures, all that,’ he said. ‘What does it mean to play by the rules of your country? It means you need to understand what the tax laws of your country are. In some cases, people are living in countries where playing by the rules is not even an option, because they’re living in a country that may have political instability; there may be corruption in the tax system; there may be lots of reasons why in some cases playing by the rules is simply not safe for the family. And then you also have countries where taxes are so high that playing by the rules for some families is just not acceptable, because it’s too expensive, and they don’t want to live in that kind of society. You have a choice, though; you play by the rules, or you get out.’
This new prohibition on cheating has been bad news for many offshore centres. The island of Jersey, for example, has seen its banking sector’s contribution to the economy fall from more than £1.8 billion at the turn of the millennium to £800 million now. In Jersey and elsewhere, assets have returned onshore, now that the traditional advantages of the old offshore centres have vanished. Jersey’s whole financial sector is far smaller than it was at the start of the financial crisis, and is showing few signs of recovery. This has had a brutal impact on the budget for the island’s government, which has been forced to bring in a sales tax to make up for the corporation tax cuts it passed in a bid to keep businesses from leaving, driving up the cost of living for ordinary islanders.
Some US citizens have sought to escape the provisions of FATCA by renouncing their citizenship, since that means they no longer have to file a tax return. In 2016, 5,411 Americans gave up their passports, up 26 per cent on 2015, which was in turn 58 per cent higher than in 2014. Only 235 passports were renounced in 2008, before FATCA was conceived of, which shows how steep the increase has been. The arrival of CRS has also been a boom for the residency-for-sale business, with companies like Henley & Partners boasting of ever greater volumes of business. After all, as Marcovici said, there are now only two options for those who want to keep their wealth out of the hands of the taxman: pay up or get out. If you take up residency outside your country, it will be your new home that gets the information about your assets, rather than your old one, which is an incentive to move somewhere with low taxes and/or honest bureaucrats.
So, is this a happy ending? Is Moneyland doomed? If you’ve read this far, you won’t be surprised to discover that it isn’t; predictions of its demise always prove premature. There are two reasons for this.
The first has been highlighted by many campaigning charities, such as Oxfam and Christian Aid. They have repeatedly pointed out that the CRS was created by the G20 and the Organisation for Economic Cooperation and Development (OECD), both of which are clubs for wealthy countries, and its terms are designed for well-resourced tax departments. Countries can choose which other places they think are sufficiently honest and competent to make use of their information: Switzerland has so far agreed to share data with only nine other countries (plus the members of the EU), all of them wealthy. To really make a difference, poor countries need to see the information about their residents, and if they are cut out of the exchange, they cannot tax them. Here is another one of those unfortunate Moneyland feedback loops: if a country’s rulers steal its wealth and stash it offshore, that country will almost certainly be deemed too corrupt to be included in information exchange programmes. That means the details of its rulers’ theft will never be revealed, so no one will ever be able to seize it back. Once again, the incentives surrounding the international financial system prevent a sustained assault on the way Moneyland works.
But anyway, that’s by the by. Even if the world’s poorest countries did receive all of the data, most of them would lack the resources to analyse what they’d gain. According to Christian Aid, the countries of sub-Saharan Africa would need to hire 650,000 new tax administrators to reach average global staffing levels, which is a number almost twice as large as the population of Iceland. And they would have to hire, train and maintain those employees before they earned any new taxes, which would naturally lead to a significant cash flow problem. So that’s the first reason why it’s too early to talk of CRS as a solution to the Moneyland problem. CRS is a first step, but the journey towards making the world’s wealthiest people obey the same laws as everyone else will still be long and fraught with dangers.
It’ll be a stroll, however, compared with problem number two.
If you think back to how offshore first appeared in the immediate post-war period, it was thanks to bankers identifying and exploiting a small but important loophole: dollars in the City of London could not be controlled by the US Treasury, and did not interest the Bank of England. The two jurisdictions’ regulatory regimes didn’t quite overlap; rich people squeezed their money through the gap, and down the tunnel into Moneyland.
The new post-Birkenfeld regulatory regime, in which tax authorities automatically exchange information with each other, has a structural weakness, too – one that was baked into it at the very start. CRS involves – as an aspiration, if not yet as a reality – everyone exchanging information with everyone else. But the United States is not part of CRS; it has its own system. Unlike CRS, FATCA, the US law that first broke the back of Swiss secrecy only works in one direction. Financial institutions from more than 100 countries have to share information on assets held by US citizens or residents, but US institutions don’t have to send anything back in return. US institutions will be fully informed about what’s going on elsewhere in the world, but their counterparts in other countries will be completely blind as to what’s happening in the United States. If you think how much money could be made out of a small loophole like the one that gave birth to the City of London’s eurobonds, just imagine how much can be made from a yawning gap like this one, in the very heart of the world’s new financial architecture.
‘If the Americans ask the Brits which Americans have accounts here in England, the Brits will give them the information. If they ask the Germans, same thing. If the Germans ask the Americans, however, the Americans say, “Buzz off.” Are you kidding me? This is the biggest hypocrisy on the planet,’ said Birkenfeld. ‘It’s a big problem, and they’re part of it.’
Moneyland is not a geographical location, it is a system, which emerges wherever conditions allow it to. The rules of Moneyland dictate that, if the money is no longer left undisturbed in Switzerland, its guardians will shift it somewhere it will be. Thanks to Birkenfeld, conditions are no longer so great in Zurich and Geneva, which have been losing business to rival financial centres now that their banks are not the impenetrable fortresses of old. But conditions are perfect in America: in places like Reno, ‘The Biggest Little City in the World’, Washoe County, northern Nevada.
In early 2007, two Washington attorneys got in touch with the Department of Justice to offer them a case. They had a client, they said, who wished to remain anonymous, but who could expose tax-dodging and rule-breaking by thousands of America’s wealthiest people, all arranged by one of the world’s most powerful financial institutions. Bradley Birkenfeld had walked into the office of the attorneys, Paul Hector and Rick Moran, almost a year earlier and told them he had ‘inside information on a worldwide conspiracy’, which he wanted them to take to the DoJ, and the attorneys had spent months collating it. ‘We’re telling you,’ they wrote to DoJ prosecutor Karen Kelly, ‘this is a once-in-a-lifetime case.’
Birkenfeld wanted immunity from prosecution in return for telling federal prosecutors everything he knew, but he didn’t get it. Quite the reverse, in fact. Although he sat in long meetings with them over the summer of 2007, and shared documents and memories, the DoJ prosecutors felt he was holding out on them. In May 2008, he was arrested on arrival in his home town of Boston and charged with Conspiracy to Defraud; a month later, he pleaded guilty, and faced a sentence of five years in prison. The statement of facts published alongside his guilty plea is a remarkable insight into the lengths that private bankers like him would go to in their quest to help their clients keep their cash out of the government’s clutches.
Birkenfeld admitted to having advised his clients to ‘place cash and valuables in Swiss safety deposit boxes; purchase jewels, artwork and luxury items using the funds in their Swiss bank account while overseas; misrepresent the receipt of funds from the Swiss bank account in the United States as loans from the Swiss bank; destroy all off-shore banking records existing in the United States; and utilise Swiss bank credit cards that they claimed could not be discovered by United States authorities’. In one instance, which caught the imagination of journalists covering the case, Birkenfeld admitted to having bought diamonds on behalf of an American client, stashed them into a toothpaste tube, and smuggled them into the United States so his client could enjoy his wealth without the Internal Revenue Service (IRS) knowing. It was like the old Goldfinger scam from the 1960s, but better: why go to the trouble of attaching heavy plates of gold to a customised Rolls-Royce that James Bond can follow all the way to Switzerland, when you can stash millions of dollars-worth of diamonds in your sponge bag?
Birkenfeld later published a book about his experiences, Lucifer’s Banker, which makes clear that the revelations in the statement of facts were barely the start of what he’d got up to. He described how he had stalked rich Americans at yacht regattas, motor sports events, classical music recitals, art galleries, and then pitched for their money over vintage brandies with a straightforward boast. ‘What I can do for you is zero,’ he’d say, enjoying their surprise, before going in for the kill. ‘Actually, it’s three zeros. Zero income tax, zero capital gains tax, and zero inheritance tax.’
When they flew out to see him in Geneva, he’d take them to a top-class restaurant, then a strip bar, where he’d pay for their prostitutes. That would get them in the right frame of mind for business, so the next morning he’d escort them to the bank where they would sign over their money. And every dollar that he brought in – all of the Net New Money, as the bank called it – would inflate his bonus, which he spent on enjoying himself. ‘Maybe it wasn’t so special, unless you’re partial to magnums of Laurent-Perrier champagne, fresh beluga caviar, or boxes of Churchill cigars just flown in from Havana. I guess it was nice if you like Frigor Swiss chocolates, Audemars Piguet watches, Brioni suits, and gorgeous girls who care only about pleasing you and having a great time,’ he wrote with inch-thick sarcasm in his memoir. ‘I’d perfected my game, flying first-class all over the world, staying in five-star resort hotels, and seducing scores of one-percenters into stashing their fortunes in Swiss numbered accounts, no questions asked.’
The prosecutors denied Birkenfeld immunity because, they said, he had tried to shield himself from prosecution, and had not been entirely candid with them. They accused him in particular of covering up his relationship with the billionaire Igor Olenicoff, a long-term client of his who had hidden $200 million in secret Swiss accounts, which were supposedly owned by a Bahamas shell company, rather than by the property developer, with the details obscured by corporate structures in Denmark and Liechtenstein. ‘We cannot have people, US citizens, engage in that kind of fraud scheme come back here and put half the leg in the door,’ prosecutor Kevin Downing told the judge at Birkenfeld’s sentencing hearing.
He had a point. You have to earn immunity from prosecution, by giving up everything you know, which is why the judge jailed Birkenfeld for forty months. But it’s true also that if anyone was going to be cut a little bit of slack, it should have been Birkenfeld. The banker didn’t just manage to incriminate himself when he came to reveal his conspiracy in Washington, he provided a priceless and unprecedented window into the heart of Swiss banking, the inner sanctum of Moneyland. And that changed the world, as Downing – perhaps a little reluctantly – conceded. ‘Without Mr Birkenfeld walking into the door of the Department of Justice in the summer of 2007, I doubt as of today that this massive fraud scheme would have been discovered,’ the prosecutor admitted. ‘That investigation now has resulted in not only changing the way in which we obtain foreign evidence from banks in Switzerland, it has caused the Swiss government to come and enter into new tax treaties with the United States.’
Few people have done more to strike at the foundations of Moneyland than Bradley Birkenfeld, whose revelations caused a revolution in the way offshore finance works. When he came to Washington, he didn’t just share his information with the Department of Justice, he also took it to the Internal Revenue Service and the Senate’s investigations subcommittee, which published a report on the matter in July 2008. According to the investigators’ conclusions, the US Treasury was losing around $100 billion a year in tax revenues, thanks to offshore schemes of the sort revealed by Birkenfeld. And the report laid out just how Birkenfeld’s employers – the Swiss banking giant UBS – had done it.
The scam was partly a continuation of the hallowed Swiss tradition of ripping off other countries, as enshrined in the banking secrecy laws of 1934, which were originally passed to protect French clients from a government that was trying to maintain its revenue base in the midst of the Great Depression. This was the same secrecy that came to be much loved by Nazi war criminals and other kleptocrats, and then exploited by London’s pioneering offshore bankers. But this was an updated version of the old scam, since it followed an agreement designed to prevent precisely such behaviour. In 2001, Birkenfeld’s former employer UBS agreed to become a Qualified Intermediary (QI), under which it promised either that its American clients would declare all their income from Swiss-held assets, or that the bank would itself withhold tax from that income, and provide it to the Treasury if the clients refused to do so. The essence of the deal was that the Swiss banks could keep their secrecy as long as they promised to collect tax on the Treasury’s behalf.
It was an elegant plan, but it had one small flaw: it required the banks to be honest. Quite naturally, therefore, it failed. In fact, not only did it fail, but UBS actively subverted it. While banks from other jurisdictions agreed to close their Swiss private banking operations, UBS aggressively expanded, marketing undeclared accounts to as many rich Americans as it could. The reason is obvious: facilitating tax evasion is extremely lucrative. ‘Undeclared accounts held more assets, brought in more new money, and were more profitable for the bank than the declared accounts,’ the Senate concluded. ‘Soon after it joined the QI programme, UBS helped its US clients structure their Swiss accounts to avoid reporting billions of dollars in assets to the IRS.’
Birkenfeld told the Senate committee how he had been part of a ‘formidable force’ of around seventy private bankers who used to attend UBS-sponsored events like Art Basel in Miami with the goal of picking up wealthy attendees. The bankers quadrupled the amount of US-originated money they held between 2004 and 2006, and were looking to quadruple it again in 2007. ‘You might go to sporting events. You might go to car shows, wine tastings. You might deal with real estate agents. You might deal with attorneys,’ Birkenfeld told the subcommittee. ‘It’s really where do the rich people hang out, go and talk to them.’
When asked why someone would want a bank account in Switzerland, Birkenfeld’s reply was blunt: ‘tax evasion. And … people always like the idea that they could hide some from their spouse or maybe a business partner or what have you.’
Unsurprisingly, the Department of Justice did not react well when it heard quite how methodically UBS has been abusing its trust. In July 2008, the US government demanded that the Swiss banking giant hand over the names of all of its US account holders, something that would destroy the Swiss tradition of banking secrecy. In normal times, UBS would have ignored the demand, or obfuscated, or come up with some work-around like the QI deal which would end up giving it new earnings opportunities. But this was during the depths of the banking crisis. By the end of October that year UBS would have offloaded $60 billion-worth of toxic assets on to the Swiss banking regulator, and written down $49 billion-worth of losses linked to the US mortgage market. Its shares had lost two-thirds of their value, and there was speculation over whether it could survive as a bank at all. It simply did not have the ammunition for a battle with the US government, on top of its life-or-death struggle with the financial markets. So it started handing over its clients’ data. It was a first crack in the mighty fortress of Swiss banking secrecy.
In February 2009, UBS came to a Deferred Prosecution Agreement, agreeing to pay $780 million in fines to various US government agencies. It admitted that 17,000 of its 20,000 American private banking clients had used its services to hide assets totalling $20 billion (that’s more than $1 million each), which earned $200 million in revenue for the bank each year. The indictment makes it clear that, while UBS might have looked like a staid buttoned-up banking operation, in reality it ran its private bank like something out of a thriller. ‘Executives, and managers … referred to the United States cross-border business as “toxic waste” because they knew that it was not being conducted in a manner that complied with United States law and the QI agreement,’ the government prosecutors stated. ‘Executives, managers, desk heads, and bankers utilised nominee entities, encrypted laptops, numbered accounts, and other counter surveillance techniques to conceal the identities and offshore assets of United States clients.’
Five years later, UBS’s great rival Credit Suisse (between them, they controlled about half of all the money in Switzerland) admitted to similar charges, though its punishment was far harsher. It had to plead guilty (rather than cop to the more lenient DPA), and pay a fine of $2.6 billion. The prosecution revealed yet more details about what Credit Suisse admitted had been an ‘illegal cross-border banking business’, which had lasted for decades, and which had serviced 22,000 Americans with $10 billion in assets. Half of those assets were controlled by a relatively small number – just 1,234, according to a Senate investigation – of extremely wealthy tax dodgers who hid their identity behind shell companies.
Perhaps the most telling aspect of the prosecution was the revelation that Credit Suisse had initially tried to comply with the QI agreement it signed up to, and even established a new private bank called CSPA with which to do so. The plan never took off, however, because its American clients were not interested. ‘The CSPA initiative ultimately failed as a business, in part due to US clients’ unwillingness to pay a premium for an account in Switzerland if their accounts were declared and tax compliant,’ the statement of facts stated. In other words, the whole point of banking in Switzerland was to dodge taxes; if a client couldn’t do that, she saw no value in the bankers’ exorbitant fees. Credit Suisse would rather break the rules than forgo those fees. Welcome to Moneyland.
It was not all high-tech. Credit Suisse had a branch in Zurich airport, so clients could access banking services without having to trek into the middle of town. Among its services was helping Americans get around the $10,000 limit on bringing cash into the United States, by breaking the total up into smaller packages. UBS was in this game, too. In the prosecution of multi-millionaire UBS client Ernest Vogliano, lawyers revealed that he moved his money from Switzerland to the United States by using travellers’ cheques, which he endorsed in Zurich, then put in the mail to be picked up on his return home to New York. That was not only absurdly low-fi, but also an almost exact copy of the first eurobond scam, all the way back in 1964, except the travellers’ cheques did not even provide any income. They just sat there until he wanted to spend them. If ever proof had been needed that Swiss bankers simply couldn’t be trusted to look after anyone’s interest but their own, the humiliation of Credit Suisse and UBS was it. As Birkenfeld told me during a long chat in a wood-panelled drawing room in his London private members’ club, complete with a vintage car in the lobby, this was just how the Swiss do business.
‘I think what these banks have done historically, and UBS in particular, is they’ve just said, “Fuck you, we’re Switzerland, we’re big, try us,”’ he explained, with a laugh. He’s an extremely affable conversation partner, big and boisterous, with a huge diamond-studded knuckleduster ring on the middle finger of his right hand, but he’s disconcertingly direct as well. ‘Was I part of it? Of course I was. It wasn’t like the janitor’s going to come in and be able to expose this … I will continue to expose it, because they’re still in denial, like an alcoholic that can’t admit they have a drinking problem.’
Incidentally, although Birkenfeld was jailed for helping his clients dodge taxes, he came out on top in other ways. New legislation designed to encourage whistle-blowers earned him a cut of the fine that UBS paid to settle its case. His share came to $104 million. At one conference I attended, he was giving away laminated facsimiles of the government cheque, to be used as bookmarks. The Treasury had deducted tax at source, so the cheque was only for $75,816,958.40, but that’s still enough to set him up for life in the style to which he had been previously accustomed.
Thanks to the UBS revelations, and other related scandals (Wegelin, Switzerland’s oldest bank, was forced to close in 2013 after pleading guilty in a similar case), in 2010 Congress passed the Foreign Account Tax Compliance Act (FATCA), which was like QI but with big sharp teeth. ‘For too long, individuals have taken advantage of the system by hiding money in accounts overseas, while millions of families and small businesses here at home pay the price,’ Treasury Secretary Tim Geithner said at the time.
Under FATCA, if foreign financial institutions declined to reveal the identity and assets of American clients, the government would impose a 30 per cent tax on any investment income received from the United States. It was a pretty compelling offer, particularly when combined with the ongoing criminal investigation into Credit Suisse and other Swiss institutions. Foreign banks could continue to help Americans break the law but, if they did so, they would be cut off from the US market, and under constant threat of a multi-billion-dollar fine. Where the QI scheme had failed, this succeeded. By 2013, five years after Birkenfeld was arrested and the UBS scandal broke, Credit Suisse had closed the accounts of 18,900 of its 22,000 US clients, and their assets had dropped to just $2.6 billion (the exact same amount as the fine it paid to the US government a year later, funnily enough). FATCA came into full operation in 2015. It still has some loopholes, but essentially it has killed the easiest form of tax evasion for Americans.
A 2017 study showed that the number of Americans reporting foreign accounts had risen by a fifth after FATCA entered into force, with an additional $75 billion of wealth disclosed. ‘US banks lost out to foreign banks selling secrecy. It was as simple as that. Then FATCA changed the rules,’ said Elise Bean, formerly the chief counsel at the Senate Permanent Subcommittee on Investigations, and one of the driving forces behind senators’ efforts to expose tax evasion. ‘FATCA has already begun discouraging offshore tax evasion, causing more US taxpayers to disclose their offshore accounts, report their offshore income, and pay the taxes they owe.’
The United States is perhaps the only country which could have done this. Its tax code requires all citizens to file a tax return even if they don’t live in the United States, so Americans can’t easily escape the rule’s provisions by moving abroad. On top of that, the weight of the US economy, and the unique global role of the dollar, has given the government more leverage in standing up to the banks than any other country could have. And where the Americans led, the rest of the world followed. European countries agreed to swap information with each other; and the various British tax havens agreed to exchange data with the UK. All these efforts culminated in 2014 with the Common Reporting Standard (CRS), under which countries agreed to automatically swap information about all the assets that each other’s residents hold in each other’s banks. Previously, countries had exchanged information, but only on request, which meant tax authorities had to know what they were looking for before they looked for it. Now that information flowed automatically, they could cross-check financial data with tax returns and see who was breaking the rules. The agreement threatened to stymie the most potent motivating force behind Moneyland, the fact that law enforcement stopped at national borders, but money did not.
Philip Marcovici, a Swiss lawyer who has counselled the wealthiest people in the world for decades, told me in 2016 that these new international agreements have completely changed the picture for the super-rich. ‘Families have only two choices: play by the rules of your country, or get out of your country. It used to be that there was a lot of abuse, that people could hide money, using bank secrecy, using complicated structures, all that,’ he said. ‘What does it mean to play by the rules of your country? It means you need to understand what the tax laws of your country are. In some cases, people are living in countries where playing by the rules is not even an option, because they’re living in a country that may have political instability; there may be corruption in the tax system; there may be lots of reasons why in some cases playing by the rules is simply not safe for the family. And then you also have countries where taxes are so high that playing by the rules for some families is just not acceptable, because it’s too expensive, and they don’t want to live in that kind of society. You have a choice, though; you play by the rules, or you get out.’
This new prohibition on cheating has been bad news for many offshore centres. The island of Jersey, for example, has seen its banking sector’s contribution to the economy fall from more than £1.8 billion at the turn of the millennium to £800 million now. In Jersey and elsewhere, assets have returned onshore, now that the traditional advantages of the old offshore centres have vanished. Jersey’s whole financial sector is far smaller than it was at the start of the financial crisis, and is showing few signs of recovery. This has had a brutal impact on the budget for the island’s government, which has been forced to bring in a sales tax to make up for the corporation tax cuts it passed in a bid to keep businesses from leaving, driving up the cost of living for ordinary islanders.
Some US citizens have sought to escape the provisions of FATCA by renouncing their citizenship, since that means they no longer have to file a tax return. In 2016, 5,411 Americans gave up their passports, up 26 per cent on 2015, which was in turn 58 per cent higher than in 2014. Only 235 passports were renounced in 2008, before FATCA was conceived of, which shows how steep the increase has been. The arrival of CRS has also been a boom for the residency-for-sale business, with companies like Henley & Partners boasting of ever greater volumes of business. After all, as Marcovici said, there are now only two options for those who want to keep their wealth out of the hands of the taxman: pay up or get out. If you take up residency outside your country, it will be your new home that gets the information about your assets, rather than your old one, which is an incentive to move somewhere with low taxes and/or honest bureaucrats.
So, is this a happy ending? Is Moneyland doomed? If you’ve read this far, you won’t be surprised to discover that it isn’t; predictions of its demise always prove premature. There are two reasons for this.
The first has been highlighted by many campaigning charities, such as Oxfam and Christian Aid. They have repeatedly pointed out that the CRS was created by the G20 and the Organisation for Economic Cooperation and Development (OECD), both of which are clubs for wealthy countries, and its terms are designed for well-resourced tax departments. Countries can choose which other places they think are sufficiently honest and competent to make use of their information: Switzerland has so far agreed to share data with only nine other countries (plus the members of the EU), all of them wealthy. To really make a difference, poor countries need to see the information about their residents, and if they are cut out of the exchange, they cannot tax them. Here is another one of those unfortunate Moneyland feedback loops: if a country’s rulers steal its wealth and stash it offshore, that country will almost certainly be deemed too corrupt to be included in information exchange programmes. That means the details of its rulers’ theft will never be revealed, so no one will ever be able to seize it back. Once again, the incentives surrounding the international financial system prevent a sustained assault on the way Moneyland works.
But anyway, that’s by the by. Even if the world’s poorest countries did receive all of the data, most of them would lack the resources to analyse what they’d gain. According to Christian Aid, the countries of sub-Saharan Africa would need to hire 650,000 new tax administrators to reach average global staffing levels, which is a number almost twice as large as the population of Iceland. And they would have to hire, train and maintain those employees before they earned any new taxes, which would naturally lead to a significant cash flow problem. So that’s the first reason why it’s too early to talk of CRS as a solution to the Moneyland problem. CRS is a first step, but the journey towards making the world’s wealthiest people obey the same laws as everyone else will still be long and fraught with dangers.
It’ll be a stroll, however, compared with problem number two.
If you think back to how offshore first appeared in the immediate post-war period, it was thanks to bankers identifying and exploiting a small but important loophole: dollars in the City of London could not be controlled by the US Treasury, and did not interest the Bank of England. The two jurisdictions’ regulatory regimes didn’t quite overlap; rich people squeezed their money through the gap, and down the tunnel into Moneyland.
The new post-Birkenfeld regulatory regime, in which tax authorities automatically exchange information with each other, has a structural weakness, too – one that was baked into it at the very start. CRS involves – as an aspiration, if not yet as a reality – everyone exchanging information with everyone else. But the United States is not part of CRS; it has its own system. Unlike CRS, FATCA, the US law that first broke the back of Swiss secrecy only works in one direction. Financial institutions from more than 100 countries have to share information on assets held by US citizens or residents, but US institutions don’t have to send anything back in return. US institutions will be fully informed about what’s going on elsewhere in the world, but their counterparts in other countries will be completely blind as to what’s happening in the United States. If you think how much money could be made out of a small loophole like the one that gave birth to the City of London’s eurobonds, just imagine how much can be made from a yawning gap like this one, in the very heart of the world’s new financial architecture.
‘If the Americans ask the Brits which Americans have accounts here in England, the Brits will give them the information. If they ask the Germans, same thing. If the Germans ask the Americans, however, the Americans say, “Buzz off.” Are you kidding me? This is the biggest hypocrisy on the planet,’ said Birkenfeld. ‘It’s a big problem, and they’re part of it.’
Moneyland is not a geographical location, it is a system, which emerges wherever conditions allow it to. The rules of Moneyland dictate that, if the money is no longer left undisturbed in Switzerland, its guardians will shift it somewhere it will be. Thanks to Birkenfeld, conditions are no longer so great in Zurich and Geneva, which have been losing business to rival financial centres now that their banks are not the impenetrable fortresses of old. But conditions are perfect in America: in places like Reno, ‘The Biggest Little City in the World’, Washoe County, northern Nevada.
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