Sunday, November 08, 2009

No law, no crime: the Hidden Treuhand

Shelley Stark is the author of the book Hidden Treuhand: How Corporations and Individuals Hide Assets and Money and, like the subject of the previous blog, someone who has suffered personally from secrecy jurisdiction operations. She writes for us here as guest blogger about the Hidden Treuhand, complementing our earlier work on trusts.


Financial crises linked to tax havens that offer legal protection and security to facilitate covert economic activities; lack of transparency and accountability a central issue.

by Shelley Stark

While many continue to blame the sub-prime mortgage crisis in the US for the financial crisis, it is becoming increasingly obvious that tax havens play a contributing role because these havens, especially in Austria, Liechtenstein, Luxemburg, and Switzerland foster the availability of hidden ‘Treuhand’ and particularly their protection. According to Prof. Picciotto, a Tax Justice Network senior advisor, there is a close link between tax avoidance dealings in offshore tax havens and the speculation that has fuelled the current financial crisis. He claims: “Large multinationals are as much financial as business entities, they have freedom to devise complex financial structures, and financial institutions such as banks, even more so: in recent surveys by the US Government Accountability Office and the Tax Justice network, the largest user of tax havens in every country was a bank.”

The use of hidden trusts has been identified as a means of operating without transparency because beneficial ownership and control of any asset, located anywhere in the world, operates in anonymity. Hidden trusts created in tax havens operate under very different rules and are referred to as ‘Treuhand’ in the German language. A hidden ‘Treuhand’ is completely non-transparent, only somewhat legal, and operates covertly by owning the asset through a corporate structure, where real shareholder identity remains anonymous in all business dealings.

Lawyers are often called upon to act as a ‘trustee’ in a hidden ‘Treuhand’. There is no law regulating hidden ‘Treuhand’, only law specifying that the lawyer cannot divulge any secrets pertaining to the client. This kind of trust is not so much protected by law as protected by lawyers. If questioned, the lawyer will simply evoke attorney-client privilege.

‘Treuhand’ contracts enjoy great protection by law. The Austrian Lawyers’ Chamber has taken great steps to alleviate any fear of embezzlement by a lawyer through a Treuhand contract registration process. Registration is optional and ensures beneficiaries that the asset held in a Treuhand contract is accessible only to the parties involved, while providing bank assurances that the responsible parties are accountable.

In the early 1990s, cavalier ‘Treuhand’ activities gave way to multiple cases of embezzlement and threatened to destroy the institution of ‘Treuhand’ in Austria. The client’s anonymity was used against the client to embezzle property, much to the chagrin of banks financially involved. Banks, caught in the fray, forced the legal community to take action to ensure both clients and lending institutions that embezzlement by lawyers would cease to occur.

The solution to this dilemma is detailed in a legal brief written in 1996 by the current Vice President of the Lawyers’ Chamber, Dr. Gerhard Horak: if lawyers are going to create hidden ‘Treuhands’, keep them as flexible as possible, and yet not have the legal authorities involved, then lawyers themselves would have to find a way to regulate their colleagues.

Dr. Horak writes: “Accumulated abuse and embezzlement by lawyers…caused great consternation among private investors and financial lending institutions, provoking hesitation to commission lawyers with trust activities. This development and ensuing lack of trust especially affected younger colleagues in the legal profession, who were unable to convince clients in the ‘Treuhand’ business sector that they were worthy of the necessary trust for ‘Treuhand’ transactions.”

As problems mounted and the actions of lawyers came under further scrutiny, the desire for a more effective means of securing ‘Treuhand’ activities increased, forcing a seminar to be held in Salzburg in 1995 to avert further damage. Dr. Horak claims: “Earlier attempts (only tentative) by the Chamber of Lawyers to intervene by regulating ‘Treuhand’ was strictly declined at the time by colleagues under the dogma and illusion of freedom within the legal profession to make contracts as they like.”

The response from the Austrian legal community was the creation of the ‘Treuhand Handbook’—an agreed upon set of guidelines drawn up by the Lawyers’ Chamber and a registration system. Their goal was to offer clients security and efficient control regarding ‘Treuhand’ transactions while maintaining freedom to arrange contracts and operate as flexibly as possible.

The Vienna Bar Association purchased a computer system for registering ‘Treuhand’ contracts and beneficiaries, to be supervised only by lawyers. The legal community considered it unfortunate that any control of trusteeships would be necessary. Dr. Horak noted: “The Lawyers’ Chamber knows that the legal trusteeship handbook is a tightly fitting corset. The wearing of this corset is much easier for all of us if the noted ‘confidentiality crisis’ could be ended.”
The registration of a Treuhand raises several points relevant to the current financial crisis. Firstly, participation by either the lawyer or client is optional. Secondly, if the client opts for registration, the client can be assured of maintaining control without being present because the lawyer has carry out all orders kept on file.

The third point is that even “anonymous Treuhand contracts” can be registered. Dr. Horak’s brief states: “In case of controlling “anonymous” trusteeships, the control is restricted to the inspection of the trusteeship index, where the trusteeship is only evident by a sequential registered number.”

Lastly, clients could not even turn to tax records as a means of getting their property back. In essence, Dr. Horak’s brief provides proof that hidden ‘Treuhand’ facilitates tax evasion and that the Austrian legal community is painfully aware of this fact. The Austrian Legal Chamber provides special conditions and security for ‘Treuhand’ clients, whereby the client’s beneficial ownership of an asset can be registered under a number much like an anonymous Swiss bank account. Banking secrecy only protects money from public knowledge, but a registered hidden ‘Treuhand’ offers the beneficial owner security and secrecy for assets capable of producing equally secret income.

Lawyers have formed their own ‘Treuhand’ regulating system to keep lawfully binding regulations from being imposed on the industry and yet maintain the freedom to make contracts that reflect the will of the parties without losing the cooperation of the banks. The lack of lawfully binding regulation offers a Wild West land of opportunity for those who can conceive of a business plan made more advantageous when the identity of the benefactors is completely concealed from public.

Perks for lawyers and their clients range from tax avoidance to outright tax evasion because neither one need declare income that cannot be traced. Moreover, it is an industry for which the lawyers themselves are the first line of defense. These lawyers have created secret legal structures despite efforts from the international community to work within and enforce the rule of law as practiced in democratic societies.

Now banks are again caught in the fray, only this time they are both perpetrators and victims. Dodgy debt in the US sold as a risk hedge to banks worldwide is one of the reasons the financial crisis is so viral. The lack of transparency involved in these transactions is why many are beginning to feel that tax havens bear a huge responsibility for transpiring events.

Nebulous financial undertakings and ‘Treuhand’ accounts in Austria, Liechtenstein, Luxemburg, and Switzerland are now impacting economies outside their borders. For example, the UBS indictment concerning 52,000 US citizens with Swiss accounts and Germany’s scandal regarding the LGT bank in Liechtenstein. High net worth individuals and corporations from all over the world come to these jurisdictions not just to evade taxes, but also to hide their beneficial ownership of an asset in another country. The key role played by hidden ‘Treuhand’ is to prevent transparency regarding economic activities, not just beneficial ownership. As a result, non-transparent economic activities are encouraged.

Shelley Stark is the author of Hidden Treuhand: How Corporations and Individuals Hide Assets and Money, published by Universal-Publishers.


Anonymous Anonymous said...

I read Ms. Stark's book shortly after it came out. It became abundantly clear to me that she answered how some of our elected or appointed officials were evading the conflict of interest laws or policies which require divesting oneself of financial relationships with certain corporate or investment entities depending on the area of influence or oversight the official has in their offical capacity.

The answer is they don't divest themselves. They hide themselves, their investments and their profits in these types of financial instruments. No wonder corruption and unethical behaviors are at an all time high both in government and industry.

And the most frustrating thing to me is that so many people I try to share this with just don't get it. They cannot afford not to "get it." This financial crime is affecting all of us profoundly, particularly those who work for a living and don't have international banking and lawyer resources at our fingertips.

Some serious financial education is needed by Americans as soon as possible. But first, they must see why this is necessary and important.

Shelley Stark's book is a good start, but I would like to see her continue with other contributions in this area with help from organizations such as the Tax Justice Network.

I have bookmarked your site now that I've found you.

6:07 pm  

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