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Tax Scandal in Germany Fans Complaints of Inequity

For wealthy Germans, many of whom have long hidden their money outside the country to avoid its high taxes, this has been a weekend of high anxiety. For their fellow citizens, it has been a riveting spectacle, dominating the public discussion for days.

Prosecutors are investigating hundreds of people, including several who are household names in Germany, on suspicion that they evaded taxes by steering money to Liechtenstein, a postage-stamp principality known for its striking Alpine scenery and discreet banks.

The fast-spreading scandal has already brought down one of Germany’s most powerful business figures, Klaus Zumwinkel, who resigned Friday as the chief executive of the German postal service after the police raided his home. He is suspected of evading $1.46 million in taxes.

The scandal bears the hallmarks of a Robert Ludlum novel, with a mysterious informant who was paid by German intelligence to turn over a data disc containing evidence of tax fraud on a vast scale.

The ripples are extending far beyond Germany’s moneyed elite, inflaming the suspicions many ordinary Germans have long felt toward well-paid corporate bosses and the free market in general.

A leftist party that campaigns against the excesses of business has made notable inroads in recent German state elections, raising hurdles for the government of Chancellor Angela Merkel, who is viewed as pro-business but has been sharply critical of the suspected tax evasion.

Evidence that Germany’s rich tucked away their cash in Liechtenstein and other tax havens is creating a new narrative in German politics: the betrayal of the elites, who have spent the last decade calling for a painful reform of the welfare state, even as they apparently avoided paying their fair share.

“The political implications of this are going to be great,” said John C. Kornblum, a former American ambassador to Germany who is a banker here. “In the U.S., we send people off to prison and say ‘good riddance,’ but it doesn’t actually shake people’s belief in the system. Here, it does.”

German authorities say they began unraveling the scandal in 2006, when a person, whose identity has not been disclosed, approached the country’s Federal Intelligence Service, its equivalent of the Central Intelligence Agency, offering a CD-ROM with data on German clients of a bank in Liechtenstein.

After checking out a sample of the information on the CD, the German finance minister, Peer Steinbrück, authorized a payment of about 5 million euros ($7.3 million) for the information.

By late last year, the material had passed through the tax agency in the state of North Rhine-Westphalia, officials said, and landed on the desk of a special financial crimes group in Bochum, a gritty industrial city.

There, the investigators recognized a kind of tax dodge they knew existed but could seldom document.

Liechtenstein, a tiny German-speaking principality wedged between Switzerland and Austria, has strict banking secrecy laws and grants favorable treatment to foundations. Many are filled with cash spirited out of Germany through various means, some as crude as stuffing a suitcase with cash and driving across the border. Smugglers are arrested regularly.

Foundations are taxed in the low single digits and are permitted to disburse money to their founders and to founders’ family members. The foundations are also permitted to open bank accounts in their own names outside the principality, which gives the owners access abroad to their cash.

Any effort to trace the owners of the foundations runs up against Liechtenstein’s tough banking secrecy laws.

Data from the LGT Group, a Liechtenstein bank with a subsidiary that specializes in foundations, appears to have formed the basis of the German investigation. The bank, which is owned by the royal family of Liechtenstein, has said it cannot confirm its part in the investigation.

But on Friday, the bank said that the German scandal might be linked to data stolen by a disgruntled employee in 2002, and it conceded that it was not sure how many clients had been exposed. “The scope of the presumed data transfer cannot be determined,” LGT said.

In Bochum, the prosecutors had enough information to obtain 13 search warrants against three people, Mr. Zumwinkel among them. With television cameras in tow, they arrived at his villa in an affluent suburb of Cologne on the morning of Feb. 14 and carted away boxes of documents.
Prosecutors announced that they had obtained an arrest warrant for Mr. Zumwinkel but did not execute it after he agreed to cooperate with them and posted a large bond.

The warrant outlined a typical Liechtenstein tax fraud, according to the German magazine Focus and the paper Bild am Sonntag: a foundation with the mailing address of Mr. Zumwinkel’s Italian vacation home, filled with 12 million euros ($17.5 million) that he obtained by selling 10 family businesses.

Mr. Zumwinkel, who helped transform Deutsche Post, the German postal service, from a stodgy state bureaucracy into a publicly listed logistics and freight-delivery powerhouse, initially tried to cling to his job. But after pressure from Chancellor Merkel and others, he stepped down.

The prosecutors announced that they had evidence against “several hundred” other German tax evaders, and an official said there would be additional raids in the coming week. Mr. Steinbrück, the finance minister, urged suspects to surrender to avoid jail time.

“The authorities are telling people even destroying documents will do them no good,” said Rudolf Schwenger, a former tax investigator in Frankfurt. “The best they can do is turn themselves in and get away with only a financial penalty.”

This latest scandal has echoes of one several years ago, in which an anonymous whistle-blower gave Bochum prosecutors a CD with names of 200 Germans who worked with a Liechtenstein citizen to hide money. The man, Herbert Batliner, who also worked with the financier Marc Rich, was a pioneer in the use of the foundation as a tax dodge.

The German Tax Union, an advocacy group, estimates that Germany loses 30 billion euros ($43.8 billion) a year to tax evasion. The government tried to recoup some of that with a 15-month tax amnesty program that ended in mid-2005. But it brought in only a fifth of the 5 billion euros ($7.3 billion) that the finance ministry had hoped for when it took the controversial step.

Spiriting money across the border is a deeply rooted tradition in Germany. During and after World War II, many wealthy Germans stashed assets in Switzerland to escape the political turmoil here — first under the Nazi regime, then under the threat of the Soviet army at their border.

They continued to take suitcases of cash to Liechtenstein, Switzerland and other havens through the postwar economic boom, when tax rates became some of the highest in Europe.

In 2002, analysts estimated that 300 billion euros ($438 billion) was hidden from tax authorities in Switzerland, Luxembourg, Liechtenstein and Austria. These four nations are more convenient for Germans to visit, and place assets in, than other tax havens, like those in the Caribbean.

But Austria and Luxembourg are now members of the European Union, making them less attractive. Like Switzerland, Liechtenstein is outside the union and depends on foreign deposits in its banks.

Several German celebrities have been caught trying to evade taxes. In 2002, the tennis champion Boris Becker was found guilty of claiming residency in Monaco when he was living in Munich.

The tax scandal comes at a moment when Germany is undergoing what analysts describe as a shift to the left politically. Despite rising employment, many Germans are dissatisfied with stagnant wage growth and do not feel that they are sharing in the gains, according to surveys.

The starkest example of this shift was the surprising strength of the Left Party in recent regional elections. The party, which brings together disaffected Social Democrats, hard-core leftists and former Communists, moved beyond its strongholds in the states that made up the former East Germany to wins seat in the state Parliaments in Lower Saxony and Hesse, for the first time.

Next Sunday, voters in the city-state of Hamburg go to the polls, and conservatives fear a rout if the public seizes on the election as a chance to vent frustrations about tax evasion and what it seems to symbolize.

Even a few German business leaders ventured their own harsh words for tax evasion over the weekend.

“Not only family entrepreneurs but also the overwhelming majority of business executives is rightly worried in light of the damage that is being inflicted on the entire profession by the misbehavior of a small group,” the head of the German Chamber of Industry and Commerce, Ludwig Georg Braun, said in an open letter published in the German news media.

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