Hidden Treuhand Trumps Regulators
Despite new controls, tax haven practices continue to ease the financing of terrorism, money laundering and organized crime
Austria’s measures to combat money laundering and terrorist financing still face obstacles achieving their goals according to a December 2009 report by the International Monetary Fund’s Financial Action Task Force (FATF). Limitations on access to ownership of assets through custodial Treuhand arrangements, foundations, and companies issuing bearer shares all help protect criminal activity.
Despite all good intentions, the FATF reports that it is impossible to satisfy the needs of clients seeking to keep banking relationships secret and hide beneficial ownership and still impose stringent verifiable rules that mandate transparency.
In Austria, custodial "Treuhand" arrangements are different from the trusts familiar to British or American clients. The Austrian legal code as described in Rummel: Kommentar zum Allegemeinen bürgerlichen Gesetzbuch states, "it is self evident that a third-party should not ever be made aware that any indirect or direct relationship exists between the businessman and the asset via the lawyer. The relationship between the businessman and the lawyer is secret, which often includes even knowledge of a ‘power of attorney’ existing between the lawyer and the businessman".
These "Treuhand" accounts can have either a lawyer or a notary as official trustee or Treuhänder and thus play an important role in the sale and purchase of enterprises and real estate. These trustees administer assets and securities, create foundations, operate trusts and open bank accounts with banks that correspondingly want this kind of business. One possibility for the trustee is to create an ‘open Treuhand’ arrangement where the legal relationship between them and the client is not held secret, or they may decide on a ‘hidden Treuhand’ where attorney-client privilege prevents disclosure of a Treuhand contract.
With a hidden Treuhand arrangement, it is effectively impossible to ascertain beneficial ownership of private foundations, corporations, and bank accounts. According to Austrian law as described in Rummel, "Treuhand contracts are not regulated, because there exists the freedom to make contracts as one pleases."
In Austria, both lawyers and notaries serve as official trustees and thus play an important role in the sale and purchase of enterprises and real estate.
"They let the bank know an account is a trust account," Rummel explains, "but do not have to disclose the name of the client, because the banking relationship is between the trustee and the bank, and not the bank and the client."
Currently, there are no measures in place for persons acting as official trustees who are not lawyers or notaries, the FATF report stated. As there is no central register of people authorized to be trustees, ownership could only be traced through a police search, involving a check of every relevant professional. In a case where the person is not a member of the Bar Association, or a notary, then the search is effectively impossible.
The impetus for the FATF initiatives lies in an interest for eliminating the opportunities for terrorist financing. The assumption made in the FATF report, however, is that neither criminals nor terrorists would be interested in engaging in the traditional financial activities or identity subterfuge, where the participation of lawyers and notaries would be required.
Complicating matters further, the laundering of personal funds is not treated as a crime under Austrian law, as Article 165 limits the scope of money laundering offences to assets "that derive from the crime of another person." In essence, these unregulated activities leave a wide loophole for criminals and terrorist financiers.
Although the criminalization of the financing of terrorist activities is consistent with the 1999 UN Terrorist Convention, credit institutions individually assess whether customers or products represent a low risk of money laundering or terrorist financing. The FATF report states "even though banks will comply with requests by the Austrian Financial Investigative Unit, court orders from the public prosecutor are rejected if in the view of the bank, adequate evidence was not presented and the legal conditions for disclosure were not met."
Another problem in identifying criminal activities is how legal authorities can become aware of criminal activities outside the due diligence banks. Even high-level staffers at Austrian regulators often lack the expertise to identify activities that lie outside the law. In a Jan. 25 interview, Dr. Edwin Zauchner at the Austrian Finance Ministry admitted that there is not one tax expert on his staff was familiar with hidden Treuhand and thus capable of identifying tax avoidance using the with hidden Treuhand mechanism.
In addition, Dir. Franz Kurz at the Tax Investigation Unit (Steuerfahndung) revealed that there are at least 70 staff people with knowledge concerning hidden Treuhand, but that not one of them has ever pursed a reported case, because the obstacles to doing so "make the effort pointless."
"Unless one provided the Treuhand contract and illustrated what illegality is occurring," says Mag. Rudolf Unterköfler of the Criminal Intelligence Service with the Federal Ministry of Interior, "an investigation would not be pursued." Outside of the due diligence of the banks, there is little laudable chance of an investigation into any hidden Treuhand activities.
How then is it possible to satisfy the needs of clients seeking to keep beneficial ownership of domestic or international enterprises discrete and still impose the necessary due diligence and stringent verifiable rules that make corporate transparency rules essential for market stability effective?
According to the FATF, beneficiary identity in the case of fiduciary accounts held by attorneys or notaries from Austria, or any other country, does not need to be provided to credit or financial institutions if several requirements are fulfilled. Those include the infeasibility of the beneficiary identity due to the representation of large co-ownership communities of changing composition, as well as the certainty that the client is not domiciled in a non-cooperative country and that no money laundering or terrorist financing have taken place.
Clearly, some people are interested in hiding their economic activities and their income because while there is no data available for assets under management in the private banking sector, aggregated balance sheets of banks in Austria show a growing trend in the ratio of foreign deposits.
Consider this: Afghanistan’s opium production has gone from 640 tons in 2001 to 8,200 tons in 2007, worth an estimated $6.4 billion on the streets of Western countries. Afghanistan now supplies over 93% of the global opiate market. And while the Taliban may move heroin out of Afghanistan to supply world consumption, it is doubtful that they will truck their ill-gotten gains back into the country just to hide them in a cave. It is highly more likely that this money would remain in tax havens in Europe where it would be safe and could be readily used to purchase ever-increasingly sophisticated equipment to carry out terrorist activities.
Despite recommendations, however, the status quo suggests that the legal community is unaware of criminal organizations’ and terrorist financiers’ intentions to hide or create profits by engaging a lawyer and possibly working in legitimate capital markets. While the FATF has recommended greater transparency regarding Treuhand relationships, there is still no viable means to achieve it as long as lawyers and banks are still the guardians of secrecy.
Shelley Stark is the author of Hidden Treuhand: How Corporations and Individuals Hide Assets and Money. Published by Universal Publishers of Boca Raton, Florida, available through Amazon and Barnes & Noble bookstores.