Cablegate: German Tax Dragnet Expands Amid Growing

DE RUEHRL #0224/01 0531658
P 221658Z FEB 08





E.O. 12356: N/A


1. (SBU) SUMMARY: The highly publicized raids by
German law enforcement officials on Germany's rich and
powerful in the ongoing tax evasion investigation
threatens to ensnare hundreds of prominent citizens.
It has also ignited a heated public debate on
Germany's moral fabric and its ability to maintain its
"social market economy" in a globalized world. The
debate ranges from:

-- the role of the German intelligence service (BND),
which lacks jurisdiction in tax matters and yet used
public funds to pay for what was essentially stolen
information in the case;

-- the adequacy of existing tax enforcement measures;

-- calls for a possible cap on top management salaries
amid the fear that growing inequality in Germany
undermines social cohesion -- an issue that SPD
Finance Minister Steinbrueck (who has led the tax
evasion campaign) is clearly hoping to exploit in the
lead-up to the 2/24 elections in Hamburg; and

-- the role of Liechtenstein and other tax havens in
Europe, which a range of commentators claim aid tax
evasion on an "epic scale".

Cynics scoff that aside from a few scapegoats, the
majority of the tax cheats will get off with a fine
and a slap on the wrist, just as they have always
have. But this time could be different. The scope of
the raids and the intensity of public outrage over the
longstanding practice of tax dodging by the rich could
make this one of the signature political issues in the
run-up to the 2009 national elections. END SUMMARY.

Deutsche Post CEO First to Fall
2. (SBU) Police and German tax authorities raided
homes and offices in Frankfurt, Munich, Berlin,
Hamburg, and North Rhein Westphalia beginning late
last week. About 1,000 people are reportedly targeted
in the investigation, and more than 100 new raids are
underway. Investigators also searched the Munich
branch office of Dresdner Bank, a subsidiary of
Europe's biggest insurer, Allianz Insurance, as well
as private banks "Bankhaus Metzler," Hauck &
Aufhaeuser and UBS. Prosecutors announced plans to
intensify their probe next week.

3. (SBU) The operation began in the morning hours on
February 14 with a raid - with heavy media presence -
on the private residence and offices of one of
Germany's most prominent and respected executives,
Deutsche Post CEO Klaus Zumwinkel. Accused of evading
tax payments of more than one million euros via tax
shelters in Liechtenstein, Zumwinkel avoided being
held without bail by admitting to the charges brought
against him and reportedly posting a bond of 1 million
euros; he is facing a potential fine of up to 4
million euros. On February 15, Zumwinkel resigned
after 18 years as head of Deutsche Post. Another
prominent victim, Bavarian Data Protection
Commissioner Karl Michael Betzl, suspended his duties
after prosecutors searched his home and office on
February 20. Betzl is suspected of having diverted
several hundred thousand euros to Liechtenstein.

The Role of the BND
4. (SBU) The German government confirmed reports that
the BND gave an informant approximately 4.2 million
euros ($6.14 million) for a compact disk containing
Liechtenstein bank data on more than 1,000 tax-evasion
suspects. Finance Minister Steinbrueck rejected
criticism that the BND used taxpayer monies to pay for
stolen information. "There would have been a cry of
outrage had we let this opportunity go by,"
Steinbrueck said, stressing the government's intention
to pursue and punish the perpetrators. Chancellery
Chief Thomas de Maiziere, who also serves as the
Federal Intelligence Commissioner, came to the defense
of the BND: "Intelligence services are interested in
reliable information - this information is.... more

BERLIN 00000224 002 OF 003

important than the reliability/scruples of the
informant." However, Deutsche Bank chief economist
Norbert Walter questions the ethics of the use of
"stolen data." He predicts this will lead to a witch
hunt of business executives.

5. (SBU) The standing Bundestag committee that
oversees the intelligence services discussed the BND
involvement in a special (closed) session on February
20. At issue is BND's mandate, which does not extend
to tax evasion. BND officials indicated that they
only acted as a facilitator between the informant and
the Finance Ministry. However, several members of the
Bundestag Oversight Committee have expressed concern
over the BND's role. Max Stadler (FDP), the deputy
chairman of the committee, noted: "The investigation
of criminal acts is the job of the police, the tax
investigators and justice officials, not the
intelligence service - this strict separation must be

Politicians Concerned Over Fallout
6. (SBU) Leading politicians -- among them SPD Finance
Minister Peer Steinbrueck and CDU Economics Minister
Glos -- have warned that the scale of tax fraud among
the highest earners in Germany risks eroding Germany's
social model. The case of Klaus Zumwinkel in
particular triggered a debate over a possible cap on
management salaries. Leading Social Democrats and
Greens raised the issue of social fairness,
highlighting the disproportionate rise in CEO salaries
compared to regular employees and the fatcats' alleged
ability to evade taxes. The head of the Association
of German Industry, Juergen Thumann, said his
organization would "shun" those who were not playing
by the rules. Ludwig-Georg Braun, head of the German
Chamber of Commerce and Industry, called on employers
to behave as role models for society. Service sector
trade union Chief Frank Bsirske called for a tax rate
of 80 percent for incomes over two million euros.
(The current highest tax bracket is approximately 45%
on those earning more than 250,000 per year.)

7. (SBU) Both the SPD and CDU called for tougher laws
and punishment for tax evasion. A close advisor to
Chancellor Merkel told EMIN that Merkel will hang
tough and not let the tax cheats off with light
sentences. FDP Chairman Guido Westerwelle, however,
cautioned against knee-jerk reactions and said the
current debate overlooked the fact that the
overwhelming majority of business leaders were law-
abiding citizens who pay their taxes. The debate will
continue as parties gear up for the February 24
Hamburg state elections, in which issues of social
fairness are expected to play an important role.

The Liechtenstein Angle
8. (SBU) In her February 20 meeting with
Liechtenstein's Prime Minister Otmar Hasler,
Chancellor Merkel demanded greater transparency of
Liechtenstein's financial system and cooperation with
German prosecutors. She pointed to a U.S.-
Liechtenstein agreement providing for the taxation of
foundations that could serve as a model for similar
agreements with EU countries. Merkel pressed for
quick progress toward an anti-fraud agreement between
the EU and Liechtenstein and urged it to cooperate
with the OECD on curbing unfair tax competition.
Meanwhile, German media reported that as many as 50
German banks were actively involved in the set-up and
administration of tax-evasion foundations in
Liechtenstein. The German Government is backed by the
EU and the OECD, with both voicing criticism over the
existence of tax havens and the lack of financial

9. A leading Economic Institute in Munich told ConGen
Munich that Lichtenstein was aiding tax evasion on an
epic scale. This would continue until the EU not only
gets tougher on Liechtenstein, but also on other well
known tax havens such as Switzerland, Monaco, and
Andorra. The Institute lauded the U.S. agreement
with Liechtenstein on withholding taxes on interest
payments and commented that the U.S. had greater
bargaining power than continental Europe because it

BERLIN 00000224 003 OF 003

could credibly threaten to bar Liechtenstein banks
from U.S. financial centers. The EU has no such
leverage because it was internally divided -- with the
UK and Ireland in particular resisting such a
crackdown. Likewise former German Finance Minister
Eichel told us that "Liechtenstein is actually only a
small fish in the pond, the bigger culprit is
Switzerland." He expressed hope that the U.S. would
help reform the current system.

The Political Angle
10. (SBU) The tax evasion scandal has become the talk
of the town. At several recent events, senior
business executives expressed concern to Ambassador
Timken that the scandal would play directly into the
hands of Die Linke. Already since its success in
state elections in Essen and Lower Saxony on January
27, support for the Die Linke Party, the former
Communists, has risen. Former FDP Chair Gerhardt
noted to the DCM that the Liechtenstein scandal may
hit many people, including members of the FDP. It
could also affect the results of the Hamburg

11. (SBU) Others, however, worry that those caught
red-handed will avoid punishment. Germany's ILO
Representative told Econ Counselor that he fears that
"nothing will change" and that the guilty will do
little if any jail time. Referring to recent losses
of German banks in risky sub prime transactions, as
well as other scandals, he noted that there is a
culture of unaccountability for the elite.

12. (SBU) The current wave of investigations has
clearly struck a chord with a German public that has
seen wages stagnate and purchasing power of "ordinary
citizens" erode over the last few years while top
executives' pay rose sharply (e.g., an average of
17.5% in 2007). Our contact at the Chancellery put it
this way: there is a common perception that
globalization has hurt the little guy, but immensely
helped the rich -- who then routinely cheat on their
taxes. The CDU can't be seen as the ally of the
malefactors. Nor can Chancellor Merkel remain silent.
But there is more: Merkel and her counterparts in the
SPD -- both representing establishment parties with
much to lose in the current scandal -- seem to share
public outrage over the behavior of the many
presumably wealthy individuals under investigation.
Germany, more than the U.S., frowns upon social
inequality. Already the debate over "social
injustice," including the minimum wage/social welfare
debate, has played a role in state elections giving
the Far Left an unexpected windfall. Left untended,
the current taxation scandal could further erode
support for the Coalition parties in 2009. "Change"
may re-enter the German political lexicon.

13. This message has been coordinated with CONGENS
Dusseldorf, Leipzig and Munich.


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