Should intelligence agencies chase tax evaders?

By Mark Hosenball

VADUZ, Liechtenstein (Reuters) - Three years ago, Germany's foreign intelligence service, the BND, paid a whistle blower close to 5 million euros ($6.9 million) for DVDs containing information on thousands of secret accounts at a leading Liechtenstein bank.

The discs contained data on 4,527 Liechtenstein foundations and financial entities, 1,400 of which were owned by Germans, according to the magazine Der Spiegel.

They also contained information on accounts held by citizens of several other countries, including Britain, the U.S. and Australia. Leaks about the data led to hearings in the U.S. Congress and the naming and shaming of alleged tax cheats around the world.

But should a spy agency like the BND -- which stands for Bundesnachrichtendienst, or Federal Intelligence Service -- take part in the unglamorous and politically charged business of collecting information on tax cheats?

Tax investigations are not part of the BND's "core competence" and therefore not really matters that the agency should have got involved in, the German agency's former chief, August Hanning, said earlier this week.

In a speech at a conference commemorating the 10th anniversary of Liechtenstein's Financial Intelligence Unit, a specialised agency the alpine tax haven set up under pressure from Germany and other economic powers, Hanning said that agencies like the BND are not law enforcement authorities.

"The BND is an intelligence service and not a prosecuting authority," Hanning said.

"The (BND) is empowered by law to obtain information of a foreign and security-political nature for the Federal Republic (of Germany). It is not...an investigative authority abroad," Hanning said.

Intelligence agencies are also not tax collectors, Hanning added, noting that he hoped that "in future this issue won't come up any more" because Liechtenstein now has an agency with sufficient competence to aid law enforcement agencies in other countries.

In an interview with Reuters after his speech, Hanning, now retired from the German government, confirmed that he did not believe that an intelligence service like the BND should be in the business of chasing tax evaders.

At the time the BND purchased the discs, Hanning was one of the German government's most senior national security bureaucrats.

SERIOUS FRICTIONS

A source familiar with the BND's involvement with the Liechtenstein bank whistle blower said Hanning's successor as BND chief, Ernst Uhrlau, came under pressure from politicians to involve the spy agency in the case, which at the time caused serious frictions between Liechtenstein and Germany.

But Jack Blum, an American lawyer who represents Heinrich Kieber, the computer expert who purloined the account data from LGT, a bank owned by Liechtenstein's royal family, said that he believed the BND only got involved in the case because other German agencies were not interested or aggressive enough in chasing tax evaders who stashed income in foreign havens.

"German tax collectors didn't do anything about it," Blum said. "What was wrong with their tax collection system and their Foreign Ministry?"

Blum said the BND -- which is reported to have re-settled Kieber in a "witness protection" program under a new name -- were "the right persons in the right place" who decided to take responsibility for accepting and disseminating the whistle blower's information.

He suggested that the reluctance or inability of German agencies other than the BND to get involved with the tax whistle blower makes the Germans look like hypocrites when they criticize countries like Greece and Italy for not cracking down on oligarchs who allegedly engage in massive offshore tax evasion.

With the European Union and the United States both under pressure to increase revenues, tracking down suspected tax evaders has become an urgent mission for finance ministries and revenue collectors.

Last month, authorities in Britain extended an offer to up to 6,000 holders of Swiss bank accounts to declare their income or face investigation after a whistle blower stole account data of 24,000 Swiss client accounts from HSBC. The information later ended up in the hands of tax agencies in Britain and other European countries.

With their sophisticated surveillance methods and experience in handling mercurial informants, undercover spy agencies like the BND and Britain's MI-6 could come under more political pressure to get involved tax crackdowns as European governments brainstorm economic and political reforms which could help solve the Eurozone crisis, a European intelligence official said.

But current and former officials say intelligence agencies on both sides of the Atlantic are likely to strongly resist attempts to involve them more deeply -- or at all -- in identifying or tracking down alleged tax cheats.

One former senior American national security official said that for the U.S. Central Intelligence Agency, there are laws prohibiting it from spying on people inside the U.S. It would be "illegal" for the CIA to deal with a tax whistle blower inside the U.S. and this is something the agency "never did and never will."

PASS ON EVIDENCE

However, former CIA Director and retired Air Force General Michael Hayden told Reuters that if the agency ran across evidence of tax evasion or some other crime, it would pass it on to other competent agencies rather than ignoring it.

"Of course, if, in carrying out our foreign intelligence activities, we came across evidence of a crime, we would report it to appropriate authorities...But the pursuit of domestic tax evaders is not the work of intelligence agencies like CIA or NSA (the National Security Agency, the U.S. electronic eavesdropping unit)," Hayden said.

European officials said that while agencies like Britain's MI-5 domestic intelligence service have some legal responsibility for investigating "serious" or organized crime, neither MI-5 nor its foreign intelligence counterpart, MI-6, were interested, or had any wish, to become involved in tax-related spying or investigations.

U.S. and European officials said that European and U.S. government tax collection agencies often pay whistle blowers like Kieber rewards for turning over hard evidence of tax evasion. But the rewards often are not paid until after the alleged tax evasion information has been checked out and proven. ($1 = 0.728 Euros)

(Additional reporting by Alice Baghdjian in London; Editing by Michael Roddy)