‘Not hopeful about SIT success’

Interview with Rudolf Elmer, a former employee of the Swiss bank Julius Baer.

London, January 2011. Rudolf Elmer (right) hands two CD cases full of files to WikiLeaks founder Julian Assange after a press conference. Elmer blew the whistle on the conduct of Julius Baer in the Cayman Islands.

RUDOLF ELMER, a banker-turned-whistle-blower and a former employee of the Swiss bank Julius Baer, has been persistently fighting the powers that be in global finance and their cronies in the Swiss government for almost a decade now. After he leaked thousands of documents related to tax avoidance structures and illegal tax evasion to WikiLeaks in 2008, Elmer was prosecuted by the Swiss government for defying Swiss banking secrecy rules. Earlier this year, Elmer wrote an open letter to Martin Graf, advisor to the Swiss government, drawing the latter’s attention to his plight during the ongoing criminal proceedings against him in Zurich. He received public support from Martin Schultz, President of the European Union Parliament, and Van Rompuy, President of the Council of the European Union. In an email interview to Frontline , Elmer expresses his apprehensions about the Special Investigation Team (SIT) formed by the Indian government to bring back black money from tax havens as well as global treaties ostensibly aimed at sharing information about tax evaders.

The newly elected government in India has constituted an SIT under the directions of the Supreme Court to bring back black money stashed abroad. To what extent do you think this initiative will be successful?

The former tax treaties and the recent international fight against tax evasion provide evidence that many of those initiatives have not been successful at all. The latest is the United States’ initiative against Swiss banks largely driven by Senator Carl Levin, Head of the Special Investigation Office of the U.S. Senate. As of now, the U.S. has received information about a very small number of Americans who hold a Swiss account. To be more specific, in the UBS case [a criminal case against the Swiss bank UBS initiated by the U.S. Department of Justice in 2009 on offshore tax evasion by U.S. citizens], 52,000 potential American tax evaders were identified and the U.S. received only 4,500 names. In the Credit Suisse case, the rate of success was even worse.

Of the 22,000 potential American tax evaders, only 250 names have been provided to U.S. authorities as of now. The U.S.-Swiss tax dispute, investigations into which were initiated in 2008, has evidently not seen much progress. Therefore, I am not so hopeful about the success of the Special Investigation Team recently constituted by the Government of India. The U.S. had a golden opportunity to repatriate assets from Switzerland but did not succeed. I doubt if the Indian investigation team will be more effective and if this is in itself an effective mechanism to bring back money stashed abroad.

Do you think more radical structural reforms in the regulatory system are required in India to stop offshore tax evasion?

In order to solve the menace of tax evasion, there must be stricter laws in place which are consistently applied. For instance, tax evaders should be sentenced to many years of imprisonment for not paying their fair share to society. I cannot recall any such case in India where a tax evader has spent considerable time in prison. In addition, if foreign bankers get caught while assisting in tax evasion they should have to face a prison sentence as well and the organisation should be made to pay a large fine. On top of all this, economic sanctions need to be considered for countries which do not assist in the sharing of information about potential tax evaders within a stipulated period of time.

Unfortunately, the implementation of strict measures and applying them is the route to take. In all fairness, a person stealing community property commits a serious theft. In such cases, the rule of law needs to be established against the dictates of power and money in order to make real progress in this fight against tax evaders. At present, the legal systems in the world are only helping in perpetuating abusive and fraudulent practices. This has to change.

Will the signing of the automatic information exchange (AIE) treaty of the OECD work to the advantage of developing countries, especially India? Will it give more bargaining powers to India to force the tax havens to share more information?

First and foremost, the automatic information exchange treaty of the OECD is not as effective as many politicians make it out to be. It is only a step in the right direction and at the moment it is only a commitment on paper. Also, there are a number of loopholes identified already in the AIE standard of the OECD. It would be pretty naive to believe that this treaty in itself, with its loopholes, would bring any advantages for countries which are not members of the OECD. Consequently, there will be no additional bargaining powers for India or any developing countries such as [those in] Africa, South America, etc.

In addition to automatic information exchange, is there a need to revise the double taxation avoidance agreements that India shares with other countries as these are being used for tax evasion?

The double taxation avoidance agreements have not made a big difference in the world of tax evaders the last few years. These have not been misused because there is a kind of tacit understanding, for instance, between the politicians and authorities of Switzerland and those in India not to close all the loopholes provided by them for multinational conglomerates, financial institutions and high-net-worth individuals. The exchange of names, for instance, of politically exposed people, celebrities etc., is definitely not working.

However, the man in the street gets the impression as if these agreements and even the AIE will be effective and are the real “weapons” against tax evaders. Consider the fact that the G20 wanted to end this business of tax havens in 2009 following the financial crisis of 2008. The recent revelations about Swiss banking [that the Swiss Federal Tax Administration is understaffed and does not even have a function such as that of a tax investigator] shows how little has been achieved on this front. The truth is that many of the tax havens are flourishing and do not provide any client names to foreign countries. Switzerland is the most recent example.

Switzerland recently signed the new global standard on automatic information exchange of the OECD. Is this a decisive moment for the Swiss authorities in trying to control offshore tax evasion by corporations or will they continue to insist on data protection and reciprocity, thereby making the implementation of this standard difficult?

I feel Switzerland and all other tax havens in the OECD will try to undermine the OECD standard of AIE and limit its effectiveness to a minimum. Switzerland and other tax havens will continue to insist on data protection and reciprocity (the demand that the recipient developing country also provide an equal amount of information when details about potential evaders are sought from a tax haven). The standard plea made by these tax havens is the protection of privacy and therefore there are considerations for making Swiss bank secrecy a part of the Swiss Constitution. This is the ground reality.

How do you see the implementation of automatic information exchange panning out?

In practical terms, it will focus on the bank account of the man in the street and not on the multinational conglomerates, financial institutions and ultra-high-net-worth individuals using offshore vehicles to hide beneficial ownership and dubious offshore transactions. Focussing on the bank account of the man in the street will not be effective and will create a big amount of data which can hardly be analysed within a stipulated time frame. A number of countries have been left out of the AIE standard which will make it easy for tax evaders to shift money to those tax havens.

What are some of the loopholes in the present OECD treaty on automatic information exchange? Is it still skewed in favour of the developed world?

The OECD standard of AIE focusses primarily on income, but kleptocrats and criminals often do not invest their money in assets which generate reportable income such as interest, dividends etc. Secondly, assets held in vaults and free ports, omnibus accounts, life insurance premia, real estate are not included, even assets in trusts are excluded. Thirdly, there is also only an assumption of reciprocity made. Fourthly, major countries are excluded such as Russia, Cyprus, Bolivia, Mauritius, Seychelles, Belize, the Philippines etc. Therefore, the countries of the developing world will not benefit from the new OECD Standard of AIE. India will be no exception! India needs to help itself or request a global standard supported by the BRIC countries.