Tax Analysts Blog

Taxes & Corruption: Another Greek Tragedy

Posted on Jan 15, 2013

If I were a Greek taxpayer I would be mad as hell. The country's latest scandal suggests that elites receive a pass when it comes to tax evasion, while those lacking access to the inner circles of power and influence are expected not only to endure the brunt of austerity but also to pay the nation's bills.

Here are the details in all their filthy glory.

A few years ago the French government made a serious effort to investigate tax evasion by French citizens with offshore bank accounts. During that probe they came into possession of detailed information on more than 2,000 Greek citizens who had undisclosed offshore wealth. The bank accounts in question were with the Geneva branch of HSBC and totalled about $2 billion. At the time, Greece was on the brink of financial implosion and jeopardized the very survival of the Euro-zone, and thus the rest of the global economy. If ever there was a nation in desperate need of tax revenue, Greece was it.

French Finance Minister Christine Lagarde (currently managing director of the IMF) sent the incriminating bank records to her counterpart in Athens, Greek Finance Minister George Papaconstantinou. The file came to be known as Lagarde's List. The Greek finance ministry proceeded to sit on the evidence for a long time. Eventually it passed along the file to the government's economic crimes unit.

Sounds great, but there's one little problem. Computer discs are easily copied. A duplicate of Lagarde's List fell into the hands of Greek journalist Kostas Vaxevanis, who published the names for all his countrymen to see. People soon realized the two lists didn't match. Three names were mysteriously removed from the version that Papaconstantinou's office forwarded to investigators. Those three people happened to be Papaconstantinou's cousin, the cousin's spouse, and the spouse of a second cousin. The list had been scrubbed.

Papaconstantinou denies any wrongdoing and blames his political rivals, including his successor as finance minister, for failing to follow through on the evidence provided by the French. It's not clear why his rivals would have any interest in protecting Papaconstantinou's family members from investigation for tax crimes.

Vaxevanis, the journalist who released the unsanitized version of the list, was immediately arrested and jailed on charges of disclosing personal tax return information. Nevermind that Lagarde's List is bank data, not a tax return. That might be illegal in Switzerland, where bank secrecy laws apply, but not in Greece. Vaxevanis was acquitted at trial last month, but prosecutors have declared the verdict erroneous and are seeking retrial on the same charges before a different court.

So much for double jeopardy and the treatment of whistleblowers who reveal corruption. The guys who call the shots in Athens apparently don't want any further disclosures. (After all, there's more than one bank branch in Switzerland. The Lagarde List may only be the tip of the iceberg.)

Papaconstantinou's political party has expelled him from its ranks. He currently enjoys immunity from prosecution for misdeeds committed while in office, but 70 members of the Greek Parliament are demanding a formal investigation which could result in the loss of his immunity. The latest bizarre twist is that Papaconstantinou now claims to know the identity of the person who tampered with the list, but he is refusing to tell anyone.

Meanwhile Greece remains a mess. The government is failing to meet critical revenue targets imposed by its major creditors, including the EU and the IMF. Creditors were assured that Greece's crackdown on offshore tax evasion would net large amounts of new tax revenue. Thus far the effort has collected only 50% of what was projected. Greece promised to conduct 300 new corporate tax audits; it has performed 88. It promised 1,300 new audits of high-income individuals; it has done only 467. You'd think that uncovering offshore accounts would be something of a priority, but these facts suggest otherwise.

Fiscally responsible leaders across Europe (think German Chancellor Angela Merkel) are not pleased. Neither is Lagarde who, ironically, is now in a position to deny Greece further emergency bailout funds. Merkel and Lagarde have a point. Why continue to throw more money at Greece when it is unwilling to tax itself.

Ultimately, the root of the problem lies in (1) a culture that tolerates widespread noncompliance, and (2) the lack of transparency in the financial sector. The latter enables the former. Remove bank secrecy from the scenario and these difficulties might never materialize. International bankers don't want to hear it, but such episodes underscore the need for automatic information exchange along the lines of FATCA or the EU Savings Tax Directive. Where transparency is absent, corruption isn't far behind.

Read Comments (1)

West Coast OffenseJan 15, 2013

Taxes ... they're for little people.(Somewhere Leona Helmsley is smiling).

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