German Foreign Intelligence [BND] has paid at least £3m for information leading to the arrest of a former Deutsche Post CEO on tax evasion charges. The BND purchased material from a former employee of Liechtenstein’s biggest bank [LGT] and the payment was authorized at the highest finance ministry levels.

The BND's material, essentially nicked from the Bank, contained the account details of about 750 German HNWIs. We understand that around 150 probes are about to be launched.

The scale of the alleged tax evasion has ‘outraged’ the Germans. Raids have taken place on homes and offices in Frankfurt, Munich, Hamburg and elsewhere, with a special emphasis on Metzler Bank. More than 100 further raids are, we are told, being planned.

It would seem that bank employees can now count access to client details as part of their pension. The person concerned is now under police protection. There are, of course, issues surrounding whether stolen documents are acceptable as evidence but this is a matter for German lawyers to consider and not us.

All we know is that a precedent has been set for European intelligence agencies and their political masters to be unashamedly involved in a criminal act in one jurisdiction in order to deal with criminal investigations in their own.

One political consequence (it is said) is that the scandal will help push Germany to the Left, a trajectory that needed no help from the BND. Mainstream anti-corporate rhetoric is emerging as the centre-left tries to claw back support from the Left and the centre-right tries to keep together a coalition fromn which it gains most benefit.

The fear on the Right (and even the mainstream centre-left) is that these investigations show that tax evasion is endemic rather than a matter of a few rotten apples. If so, more leftish social democrats see a chance to exploit what will be widely taken as an abuse of the ‘German model’.

The Christian Democrats do not seem minded to defend business. Business refuses to fight back, knowing the political conditions it faces inside Germany. The economic establishment is so worried about a witch-hunt that it is effectively telling those who are about to be caught that they will be isolated without any support from the (implied) law-abiding majority

This has given a further push to EU and OECD initiatives to force tax havens to become more transparent.  The political ramifications are very much part of the calculations of an intelligence community that operates at levels quite separate from direct national political decision-making. 

Treasury Ministries and the intelligence community may be semi-detached from one another officially. Economic crimes are increasingly a national security issue and intelligence-sharing and co-operation the rule rather than the exception.

Public reaction in Germany shows that the media and the electorate broadly endorse the use of the BND (equivalent to the CIA or MI6) in its use of stolen materials in the national economic interest.

The BND's subsequent comment is worth quoting [as reported in the Financial Times, 16 February]:-

“A big part of our job is to track financial transactions that underpin terrorism, money laundering, organized crime and nuclear proliferation. We therefore keep a close eye on financial and trade centres. If, in the course of this work, we are offered information that does not pertain to this spectrum but could be of interest to other agencies, we will pass it on to the relevant bodies …”

Money laundering, organized crime and tax evasion by the haute-bourgeoisie are now firmly positioned within the same basket of ‘economic crimes’. HNWIs of all types be warned.

This is not just a German but a European-wide phenomenon. One cross-over victim is wealthy Italian business figure Leonardo del Vecchio who is E20m [£15m] poorer in fines, back taxes and interest after an investigation into an accounting change that affected his German-based interests and whose interpretation he disputes.

Since the tax authorities tend to investigate and judge in their own interest, many HNWIs are likely to find themselves on the wrong side of an ideological crusade, fully buttressed by public opinion, before too long.

This is not socialism, of course, but something we might call neo-republicanism, the assertion of state authority over those who are supposed to be part of the community but who increasingly operate in cross-border environments.

The Germans are now placing intense pressure on Liechtenstein over transparency. Naturally enough, the little country is resisting.

Liechtenstein’s Crown Prince Alois fought back against being 'bullied' by such formidable forces, declaring in effect that Germans had attacked his country – not militarily, of course (Germans having given up such methods in 1945).

Indeed, the Germans are threatening sanctions, the modern form of warfare but its attack on Liechtenstein as a tax haven cannot be understood unless seen as part of a wider OECD strategy. The OECD and the EU were certainly not shy in endorsing Merkel’s calls for greater financial transparency fro. the Principality.

In effect, the little country is regarded as a place out of time that needs to be brought into line, something left over from the Holy Roman Empire.

And if this was all happening just as Liechtenstein’s Prime Minister visited Berlin, we find this no surprise given the centrality of the problem of tax havens to European policy-making and the rather acute sense of the value of publicity amongst OECD officials.

Liechtenstein is far too small not to give way eventually. It has already announced a tightening up of controls on banks, including extra powers for financial regulators – although it claims that the new regulations are ‘coincidentally’ timed. The 'no coincidence' is that the Prime Minister comes into negotiate with these concessions and the BND plans its raid just before he arrives.

The OECD is the 'evil genius' lurking behind these shenanigans. It has been hammering at small tax havens like Liechtenstein for well over a decade under US Treasury and French Finance Ministry pressure. London itself was a primary target in the 1990s and at the turn of this century.

OECD officials will have been doing a little victory dance at its Paris offices at the prospect of bringing down one of the worst ‘perps’ in Europe.

The little Liechtensteiners have one argument that the Germans do not want to hear but which many European business interests and Anglo-Saxon euro-sceptics of the Right may well re-introduce into the political debate – that this level of tax evasion would not have happened if the German model did not screw so much tax out of the business sector in the first place.

This is not an argument that the Europhiles (with their ambitions for great power status) or the OECD wants to hear, but, when the dust has settled, we may see that tax evasion was a safety valve.

German and other European business lobbies may now seek more domestic political influence to drive down tax rates altogether, something Germany has been mercifully free from compared to the Anglo-Saxon West.

The German tax investigations could eventually prove a major own goal for the corporatist interest, especially as OECD tax havens policy is already driving mobile money further and further away from the key finance centres in the West.

The UK Government’s non-domicile taxation proposals have been exaggerated in the short term, in a campaign promoted aggressively by the Financial Times in particular but our relevant here.

The Government’s recent retreat on policy and the reality that most international professional and financial services functions can be operable from a number of well-resourced centres around the world means that the State cannot now have its cake and eat it – a full engagement in the global economic system and high business taxation.

Whether in Germany or the UK, HNWIs and business interests at the top end can decide where to live and work on the basis of the cost to them. Higher taxes mean higher salary bills for higher level executives. 

The model promoted by the OECD either means less criminality (the driver for the American component) but eventually lower taxes or it can mean higher taxes and lower economic growth (and instability) assuming a country stays well within the global market system.

What it cannot easily do is sustain the social democratic model of higher taxes and higher economic growth based on consensus between classes. The global economic system creates in-built pressures to export jobs to lower cost centres and to seek lower tax jurisdictions. The advanced economies end up on a lower tax and higher cost of education and economic infrastructure treadmill that whips funds away from welfare and even security.

In grander political terms, this internal contradiction – that low tax rates are required to create gross tax take in a global economy – spells the doom of the ‘third way’ and the corporatist politics of both the Anglo-Saxons and Europeans.

It also implies relative periodic pauperisation of those members of the middle class who cannot operate globally whenever there is a serious localised recession or a more general 'loss of competitiveness'.

Perhaps this is what Mervyn King, Governor of the Bank of England was warning us about when he advised that general living standards would fall for the British in the coming year.

In the end, countries are going to have to choose to be either economic Romans (part of a global system) or economic barbarians (operating along national interest lines). Their electorates, where they are democracies, may force the pace according to local conditions.

In the end, this is going to be partly a matter of ‘class’ – the power of the dominant class interest within the electorate will dictate where a country plays in the great economic game.

For Germany, the stakes are particularly high because its corporatist model can probably only survive if extended to a higher EU or even Transatlantic level - and yet the allies required to do this will set standards of lower taxation and micro-de-regulation that will unravel the 'understanding' that has kept the nation together for sixty years.

What Merkel and her Western allies want is a transition to a situation where 'good' Germans can pay less tax because 'bad' Germans are not allowed to evade tax.

The total tax take will then remain, with growth, enough to pay for at least the basic welfare state and the West becomes an innovative, entrepreneurial economy with flexible labour and capital markets, da-dee-da-dee-da ...

What the OECD strike against Liechtenstein and other tax havens does, though, is frighten the wealthy not just into compliance but also into flight, while mobilising the Left, reasonably enough, into asking why such evasion has been tolerated and whether the welfare state could not have been even better maintained if these funds had been available in the first place. 

The Left may ask why taxes should not be raised further to force the business community (its class enemy) to pick up the tab for its criminal elements.

The use of foreign intelligence services as an instrument of economic warfare also opens up a new can of worms in an age of massive bank write downs and sovereign wealth funds. 

If an intelligence service may suborn an employee of a bank in a neighbouring democratic country (not some far-away rogue state like Iran), how long before it is digging deep into the files and data banks of its own audit firms and banks to predict the dodgy ones and pin down 'economic criminals'.

To what extent are democratic sovereign small states now going to have their small competitive advantage removed to maintain the needs of large ones?  And do not think that this is not relevant to London. 

As a financial city state, the City of London is in the same relationship to a fully federalised EU as Liechtenstein is to a federalised Germany. It can only be a matter of time before a foreign intelligence agency purloins data from a British-domiciled financial institution to meet its national economic needs.

What is the betting that there is far more of this going on already than we can possibly imagine. The BND case has been made public only because it is politically convenient, that is all.

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