Germany’s Fruit FromLiechtenstein’s Poisonous Tree

by Wolfgang Kessler and Rolf Eicke

Reprinted from Tax Notes Int’l, March 10, 2008, p. 871

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Germany’s Fruit From Liechtenstein’s Poisonous Treeby Wolfgang Kessler and Rolf Eicke

Not all fruits are healthy; some fruits are poison-ous. German prosecutors must wonder which of

their collected ‘‘fruits’’ they can use against the hun-dreds of individuals that could be indicted for failing todeclare savings in Liechtenstein. What could turn outto be the biggest tax evasion case in German historystarted with a simple DVD. A Liechtensteiner offeredand sold a DVD with stolen bank data to the GermanIntelligence Service (Bundesnachrichtendienst, orBND) for €4.2 million. The identity of the Liechten-stein citizen has not yet been officially released, butaccording to The Wall Street Journal, his name is Hein-rich Kieber, a former employee of LGT Bank, which isowned by the Principality of Liechtenstein. Mean-while, the BND said that Kieber is not the source ofthe information. Ironically, Liechtenstein, having re-fused to offer any tax cooperation or legal assistance ineven simple tax evasion cases in the past, asked Ger-many for legal assistance to find the person who stoleand sold the data to the BND.

The story unfolded to the public on the morning ofFebruary 14, 2008, when tax investigators raided thehome and office of Deutsche Post CEO Klaus Zum-winkel. Zumwinkel resigned and managed to stay outof jail after paying a considerable amount of his taxliabilities. Many raids have been conducted since then,and more are about to be. The prosecutors are follow-ing the so-called five phases strategy. The first phasewas the raid of the house and office of Zumwinkel togain public attention. In phase two, tax exiles werepublicly advised to file a self-accusation of tax evasion.Phase three encompasses raiding more private housesand offices of other suspects. In phase four, prosecutors

question suspects and attempt to achieve a settlement.In phase five, prosecutors and tax investigators take onthe banks and Liechtensteiner trustees (Treuhänder) thatsupported the tax evasion.

There has been much speculation in the Germanmedia on why a small fraction of wealthy Germansevade taxes. The potential reasons range from the per-son’s self-perception of being able to stand above andbeyond the law, to greediness, to the need to take risks.These explanations try to grasp the phenomenon thatthe economic theory of the declining marginal utilityof money does not apply to a few wealthy individuals.Politically, this conduct of the few helps left-wing poli-ticians appeal to the masses and present their policies.Even worse, it erodes the acceptability of the entire taxsystem.

Three QuestionsThe Liechtenstein case involves three major issues

that go far beyond German international criminal taxlaw. First, to what extent does the United States’ ‘‘fruitof the poisonous tree’’ doctrine apply in this case? Sec-ond, did the conduct of uncooperative tax havens likeLiechtenstein spark the actions of German tax investi-gators? And finally, which counteractions can theUnited States, Germany, and other so-called high-taxcountries take to fight the kind of conduct performedby Liechtenstein?

Fruit of the Poisonous TreeMany Germans could not believe it when they

learned that the BND was involved in a tax evasion

Wolfgang Kessler is the director of the tax department of the business and economics faculty at the Uni-versity of Freiburg and a partner with Ernst & Young in Freiburg, Germany. The views expressed here areentirely his own. Rolf Eicke is his assistant at the tax department of the University of Freiburg. E-mail:Wolfgang.Kessler@tax.uni-freiburg.de and Rolf.Eicke@tax.uni-freiburg.de

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case, a playing field on which the Intelligence Servicehas neither the authority nor the power to act. TheBND justified its participation by saying that it wasproviding only administrative assistance for the Minis-try of Finance. The purchase of stolen data was only aby-catch in the crusade against international terrorismand other major crimes.

The crucial question for the upcoming proceedingswill be whether the data can be used against the sus-pects. One problem is that it was stolen from the LGTBank in Liechtenstein; another problem is that the con-duct of the BND could be considered as receiving sto-len property, as Zumwinkel’s attorneys argue. Somecommentators maintain that there is no receipt of sto-len property because the German authorities will sendthe DVD back to Liechtenstein after analysis. However,this legal opinion is highly contestable.

Until recentlyLiechtenstein wasperceived as apicture-postcard taxhaven.

The issue of whether evidence is admissible in taxproceedings if it was obtained illegally will be the focusof upcoming legal discussions. The answer will notonly serve as the cornerstone for legal policy, but willalso tip the scales for the outcome of those cases thatare based on stolen bank data. This is known meta-phorically in the United States as the fruit of the poi-sonous tree doctrine, which is an offshoot of the exclu-sionary rule. The exclusionary rule states that if thesource of evidence (the tree) is tainted, anything gainedfrom it (the fruit) cannot be used as evidence, except inthree restrictive situations. The purpose of the doctrineis to deter law enforcement from violating the FourthAmendment protections against unreasonable searchesand seizures.

However, the fruit of the poisonous tree doctrinecannot be adopted at large in German criminal tax law,because the roles of the parties participating in thecriminal proceedings are different from those in theUnited States. In Germany, major crimes can justifythe use of information derived from an illegally ob-tained source. Moreover, the question is whether it isjustified to use stolen data in the courtroom in light ofthe fact that Liechtenstein has not shown much will forcooperation in the past. The only concession Liechten-stein has made is to help in cases of money launderingor terrorist affairs. Tax evasion is not a crime in Liech-tenstein. German tax investigators claim that buyingbank data is the only measure to effectively fight tax

evasion. Is this the only resort left for high-tax coun-tries to fight tax evasion? Is there a justification called‘‘state of tax emergency’’ against an offense that de-prives countries and communities from obtaining thefunds they are legally entitled to claim? If so, such anotion could constitute the bursting of a dam, provok-ing the question of how illegal the supply of informa-tion must be to be inadmissible in criminal tax pro-ceedings. Moreover, would admitting the informationinto evidence before or in the course of the proceed-ings mean that the legal system supports and rewardsoffenses and crimes? Or was this measure mandatoryto promote equal taxation?

The query must be posed: What would have hap-pened if the BND had refused to purchase the DVD,with the consequence that many millions of euros inrevenue could not have been gained for the citizensthat pay their taxes in compliance with the law? How-ever, embracing this argument would entail fosteringthe commercialization of criminal tax law, because itwould officially open up a market for the trade of in-formation. The result could be that cases depend onwhether the tax haven bank or the foreign tax jurisdic-tion offers more money for the sensitive data.

Discussions of the fruit of the poisonous tree doc-trine in German literature are highly controversial, andare rarely applied in practice. The Liechtenstein casemight serve as a starting point for looking at the morepractical relevance of this doctrine.

Conduct of LiechtensteinUntil recently Liechtenstein was perceived as an (al-

most) picture-postcard tax haven. Unlike some mem-bers of other royal or noble families who have to (orwant to) read the stories of their lives in the news-papers, the members of the nobility of Liechtensteinhave managed to appear in sophisticated businessmagazines, promoting and advertising the attractivefeatures of Liechtenstein as an investment location.Because of the latest tax affair, Liechtenstein maystruggle to survive as a major financial center if it doesnot make any concessions to the EU, the OECD, orthe United States.

Liechtenstein, located between Austria and Switzer-land, has a long tradition of attracting foreign capitalas an offshore center. Liechtenstein’s trust regime(since 1926) and the creation of the Anstalt are as wellknown as its bank secrecy. Even though the country isnot a member state of the EU, it is a member state ofthe European Economic Area.

However, the EU and the OECD have been target-ing Liechtenstein’s tax system and tax policy. Liechten-stein is one of the few countries left on the OECDblacklist of uncooperative tax havens, sharing this fateonly with Andorra and Monaco. Efforts have been un-dertaken to improve Liechtenstein’s reputation. Liecht-enstein is working on a tax road map both to enhance

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its attractiveness as an investment location and to com-ply with EC law and international standards.

Liechtenstein is a sovereign country with fiscal sov-ereignty. The citizens of Liechtenstein embrace the say-ing, ‘‘Tax oases can only exist where there aredeserts.’’ However, this attitude and self-promotion in-vites criticism. Recently, the leader of the German So-cial Democratic Party, Kurt Beck, accused Liechten-stein of committing ‘‘tax robbery,’’ and Minister ofFinance Peer Steinbrück cited from an internal paperof the Ministry of Finance that Liechtenstein’s busi-ness model is the assistance of tax evasion. At the coreof their concern is the fact that the 75,000 trusts (Stif-tungen) in Liechtenstein are anonymous, making it al-most impossible for foreign tax authorities to linkLiechtenstein income to their taxpayers. Despite theenormous pressure on Liechtenstein because of therecent affair, the principality is poised to maintain itsanonymous trust regime. Instead, Liechtenstein’s policyis to blame the other tax systems as being too complexand too excessive. On February 22 Prime Minister Ot-mar Hasler of Liechtenstein announced in an interviewwith the German newspaper Frankfurter Allgemeine Zei-tung that Liechtenstein considers it a tradition not to

prosecute tax evasion. Moreover, he said that it de-pends on the ‘‘skills’’ of the foreign tax authorities tofind tax exiles.

Yet it is doubtful whether Liechtenstein will be ableto maintain its widely uncooperative position. If therewas unanimous will, the EU could quickly dry upLiechtenstein’s tax oasis. Moreover, because of recentmeasures of the EU and its member states, Liechten-stein’s business model is already endangered. The wordis that some German individuals are preparing to giveup Liechtenstein accounts and transfer money to theCayman Islands, Hong Kong, or Singapore. Thus,Liechtenstein’s noncooperation strategy could soonlead to a demise of one of the world’s major financialcenters. Transparency and cooperation should be themeasures of the hour, because fiscal sovereignty doesnot provide for a charter to deprive other sovereigncountries of their revenue. Since Liechtenstein allegesnot to deprive other countries, transparency and mutualassistance are the only means to counteract this percep-tion. Moreover, the German government offered to givethe bank data free to countries interested in obtainingit. Germany is also addressing this issue on the inter-national level (with ECOFIN) and will push for meas-ures against Liechtenstein’s conduct.

LiechtensteinProsecution

Taxpayer

LGT Bank

Fruit of the Poisonous Tree

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CounteractionsIn the wake of the LGT Bank tax evasion case,

other countries such as the United States and theUnited Kingdom will redefine their policy towardLiechtenstein. Germany and the United States are be-ginning the process now. U.S. Sen. Carl Levin,D-Mich., plans to investigate money transfers betweenU.S. citizens and LGT Bank. Because of severe pres-sure by the U.S. IRS to sign ‘‘qualified intermediaryagreements,’’ LGT Bank and other Liechtensteinerbanks must disclose to the IRS information on interestand dividend payments made to U.S. citizens, includingthe identities of those recipients. Currently, the Ger-

man government plans to impose withholding taxes onpayments between German citizens and Liechtenstein.

ConclusionThe Liechtenstein case has sent shock waves far be-

yond Germany. It reveals to the public in an unprec-edented manner the conduct of a few individuals andof the Principality of Liechtenstein. According to theGerman tax authorities, the purchase of stolen bankdata was the last resort to fight tax evasion effectively.For those individuals connected to the data on theDVD, the fruit of the poisonous tree doctrine might betheir last resort to avoid conviction. ◆

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