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Whistleblower Helps Berlusconi Hit Tax Fraud While He’s Accused

Whistleblower Helps Berlusconi Prosecute Tax Fraud
Herve Falciani, a French citizen and former employee of HSBC Private Bank in Geneva. Photographer: Valery Hache/AFP/Getty Images

Italy’s finance minister Giulio Tremonti has a new weapon to pursue tax cheats in a country starving for revenue: a former HSBC Holdings Plc employee now in police protection in France.

Two years ago, Herve Falciani, then a software technician at HSBC’s Geneva offices, made off with computer files containing data on at least 24,000 current and former account holders from several countries. Claiming he wanted to curb the illegal flow of money across borders, Falciani helped French authorities access names he kept on his laptop for their probe of tax evaders. And in May, the French shared their windfall with Italy’s prosecutors, including the identities of 5,728 Italian citizens and companies holding Swiss accounts valued at $6.9 billion, Bloomberg Markets magazine reports in its September issue.

“Something was going wrong, and it was a danger not only to the bank, but to clients and states,” Falciani says from his lawyer’s office in Nice on the French Riviera.

Now, Tremonti is using Falciani’s list to spearhead a new crackdown on tax evasion, a scourge that’s bedeviled Rome’s collectors since the founding of modern Italy 149 years ago. Cheating is so pervasive in Italy that even Tremonti’s boss, Prime Minister Silvio Berlusconi, is on trial for tax fraud related to his broadcast company’s offshore purchases of film rights.

While previous finance ministers have railed against lawbreakers, Tremonti is more determined to actually catch them because of the seriousness of the government’s debt crisis, says Graham Harvey, who researches Italy as a director at Scorpio Partnership Ltd., a London-based wealth management advisory firm.

Escaping Downgrades

“Italy makes a big statement promising a crackdown about every five years,” Harvey says. “But the economic crisis has made the issue of tax evasion a lightning rod. Many sovereign states are trying to balance their books, and they’re going after perceived tax evaders as one way to do it.”

Greece and Portugal are closer to defaulting on their debt than Italy, according to Moody’s Investors Service. While its southern European neighbors, including Spain, had their credit ratings cut since May, Italy has escaped downgrades mostly because of its smaller budget deficit. At 5.3 percent of gross domestic product, Italy’s 2009 gap was less than half of those of Greece, Ireland or Spain. Still, Italy’s deficit exceeded the European Union limit of 3 percent and was worse than Denmark’s, Finland’s and Germany’s.

Bugging Devices

Like Greece, Italy is hunting scofflaws to raise revenue. Since 2009, Tremonti’s finance police have started using many new computer programs to track and cross-reference financial data to nab offenders, says Brigadier General Giuseppe Vicanolo, the force’s head of operations. The technology helps police discover whether people have properly reported their bank accounts outside of Italy to the government, and whether Italian companies doing business with each other offshore declared the goods and services exchanged.

The finance police, who have beefed up their army of tax inspectors by 25 percent since 2004, are also gathering evidence at more than 100 provincial outposts across Italy.

In a small office in Milan that has grainy mug shots taped to the walls, officers wearing headphones sit elbow to elbow at seven desks, typing on computers as they listen to calls picked up via bugging devices and wiretaps.

Spending Cuts

The plainclothes cops glance up at a wall-mounted monitor, where red dots flash on a map of Europe. Each dot is produced by a GPS-linked bug hidden in a car. And each car belongs to an Italian suspected of committing financial crimes.

“Instead of just shouting about tax evasion, we’re taking effective, strong and concrete action,” Tremonti said in May. He declined to comment for this article.

Italy’s economy may rise or fall on Tremonti’s ability to curb evasion. The center-right Berlusconi government declared in May that it won’t boost tax rates to reduce the 78 billion-euro ($98 billion) budget deficit for 2010. So if the finance police don’t haul in more revenue through enforcement, the government will have to cut spending beyond the 25 billion euros announced in May, threatening to slow Italy’s recovery.

The government forecasts that the economy will expand just 1 percent this year after shrinking 5 percent in 2009. From 2005 to 2008, revenue denied the government by sales-tax offenders was the equivalent of 2 percentage points of gross domestic product a year, Bank of Italy Governor Mario Draghi said in May.

“Tax evasion is a brake on growth,” he said.

Illegal Fronts

Italy’s tax-dodging underground economy is the second biggest in the euro region after that of Greece. Italy’s 275 billion euro black market comprised 17.5 percent of GDP at the end of 2008 according to the government, robbing it of 100 billion euros a year.

Businesses routinely deal in cash, breaking rules that require taxable receipts. Doctors sometimes offer two different prices for checkups: 50 euros with a receipt or 30 euros without one. Large companies circumvent Italy’s 20 percent sales tax by falsely claiming they make purchases from foreign companies, when instead they buy from Italian firms with illegal fronts abroad. Landlords, who must register leases with the government, set official lowball rents that are taxed and then collect more money through side deals with tenants. And the well-off smuggle their savings to places such as Lugano, Switzerland, where it generates investment income that escapes levies.

Berlusconi’s Trial

Berlusconi, who has been on trial for tax fraud since 2006, says he understands why Italians skirt the law. Those who pay taxes compensate for the evaders, giving about half of their income to the state, the finance police say.

“If taxes are as high as 50 or 60 percent, then it seems too much, and you feel somewhat justified to elude or sometimes evade,” Berlusconi said in a 2008 speech to the Italian builders association.

Prosecutors in Milan say the prime minister failed to report profits from buying television broadcast rights and then selling them offshore to his company, Mediaset SpA, at inflated prices. Berlusconi, 73, has repeatedly denied wrongdoing, saying the charges are politically motivated. The trial is currently suspended because of a temporary immunity measure passed by Berlusconi’s allies in March.

“A tax crackdown is a great idea, but then it never happens,” says Giovanni Sartori, a retired professor at New York’s Columbia University and the author of books on Italian politics. “It’s because our political class themselves are tax evaders.”

Police Crackdown

Tremonti, 62, a former tax law professor who wears horn-rimmed glasses and delivers speeches in a monotone, is an unlikely crusader. He joined Berlusconi’s first government in 1994 and has served under the prime minister through at least 12 corruption and tax scandals.

In the first five months of 2010, Tremonti’s finance police helped bring civil charges against 3,790 evaders who had never paid any taxes, an 18 percent rise from a year earlier. They were hiding 7.9 billion euros in income from taxes. Overall, the police uncovered 22.2 billion euros in undeclared business and personal revenues, a 62 percent increase. Still, these were modest accomplishments. Tremonti’s plans to bring in 1.3 billion euros in uncollected tax revenue in 2011 would amount to just 1.7 percent of this year’s deficit.

Michele Boldrin, an economics professor at Washington University in St. Louis who has written about Tremonti’s tax policy, says the finance minister is looking for a quick fix by targeting offenders. Boldrin says Tremonti needs to overhaul the labyrinthine tax code if he hopes to reduce violations. Italian businesses and citizens navigate so many different levies -- including tax stamps needed just to post a “For Rent” sign outside a home -- that abuse is inevitable.

Swiss Arrest

“The tax system is so utterly opaque that the opportunities for evasion abound,” Boldrin says. “He’s not trying to reform, simplify and streamline the tax system. What he’s trying to do is scratch the bottom of the barrel.”

The finance police say they’re now using files from Falciani, the former HSBC technician, to investigate Italian bank account holders. In his lawyer’s office in Nice, Falciani, in wraparound Ray-Bans, a fitted, red T-shirt, jeans and calfskin loafers without socks, says he had information about account holders on his laptop as a normal part of his work. HSBC says he stole the data, and on Dec. 22, 2008, Swiss police arrested him on suspicion of theft. Falciani, 38, who has dual French and Italian citizenship, says he left Switzerland for France the next day to spend the Christmas holiday with this family.

HSBC Apology

Swiss police then asked France to cooperate with their probe of Falciani. After French officials seized his laptop and learned of its contents, they say they started their own probe of nationals with HSBC accounts. Falciani, who says he’s cooperating with French investigators, helped them pull the embedded data from his laptop.

The technician says he didn’t profit from the data and accepted police protection in France out of fear that account holders might try to harm him. As of mid-July, the Swiss attorney general’s office said it was continuing the data-theft probe of Falciani, who hadn’t been charged.

Alexandre Zeller, chief executive officer of HSBC’s Swiss private banking unit, said in March that the bank deeply regretted the breach of privacy and apologized to its clients. HSBC says Swiss account holders, and not the bank, are responsible for ensuring that they comply with tax laws, a bank spokesperson says.

Vicanolo, the Italian police official, considers the Falciani list a breakthrough because HSBC is Europe’s biggest bank by market value.

Imprisoned Billionaire

“Tax havens are at the top of the agenda,” he says.

Last year, hundreds of finance police dressed in business suits paid surprise visits to at least 76 branches of banks in Italy with links to Switzerland and the republic of San Marino, including UBS AG. They found that some of the banks had clients whose foreign accounts hadn’t been declared to the Italian tax authorities.

Italian prosecutors are using their extraordinary powers granted decades ago to jail suspects for long periods without charges. Billionaire Silvio Scaglia, founder of Italy’s second-biggest fixed-line phone company, Fastweb SpA, has been under arrest since February. As of mid-July, he was waiting to hear if he will be charged and tried for allegedly conspiring to evade as much as 38 million euros in Italian sales tax by using fake foreign companies as suppliers.

Scaglia spent most of the first three months of his arrest in the Rebbibia prison on Rome’s outskirts, and he’s now under house arrest at his Alpine home near the foot of Mont Blanc. He denied any wrongdoing through his Milan-based lawyers.

Amnesty for Cheats

Tremonti’s crackdown is in sharp contrast to his amnesty programs for cheats. He has overseen four tax pardons, in 1994, 2002-3, 2003 and 2009-10, in which Italians declared secret overseas assets or unpaid domestic taxes in exchange for immunity from prosecution. Under the programs, evaders paid one-time fees of as little as 5 percent of the untaxed income or undeclared assets -- much less than the fines and back taxes they’d otherwise be liable for.

Tremonti’s 2009 amnesty showed the extent to which Italians use foreign accounts to sidestep taxes. They declared 100 billion euros in assets whose investment gains hadn’t been subject to taxation. The amnesty dealt a blow to tiny San Marino, a landlocked nation in northeastern Italy, draining it of 23 percent of its bank deposits, or 2.2 billion euros, San Marino’s central bank said.

‘Hail Marys’

The amnesty also sapped money from Switzerland’s Credit Suisse Group AG, which said about 5.6 billion Swiss francs ($5.3 billion) in client assets left during the fourth quarter of 2009. By charging Italians the one-time fee for newly declared assets, Tremonti brought in 5 billion euros from around the globe during 2009.

Italy’s center-left opposition Democratic Party criticizes Tremonti’s amnesties, saying they encourage tax evasion since Italians know they won’t be punished.

“It’s like three Hail Marys for committing murder,” says former Prime Minister Romano Prodi, an economics professor who offered no such amnesties during his two terms as premier, from 1996 to 1998 and 2006 to 2008.

Prodi says tax cheats should be punished under the law, not pardoned. Tremonti hasn’t announced plans for any future amnesties.

Italy’s leaders have been vowing to curb tax evasion since the nation emerged from the rubble of World War II.

CIA Report

“Because the level of civic morality in Italy is notoriously low, however, the government will have great difficulty in achieving these reforms,” read a recently declassified 1949 U.S. Central Intelligence Agency report on Italy’s attempt to stop cheaters. What’s different now is that Italy’s debt has ballooned to 1.8 trillion euros, amid a continent­wide crisis. The Berlusconi government, having cut its budget by almost 3 percent, is now trying to buck decades of tradition by getting people to pay their taxes.

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