VZCZCXRO5027
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHRL #0224/01 0531658
ZNR UUUUU ZZH
P 221658Z FEB 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 0502
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNMEM/EU MEMBER STATES
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 03 BERLIN 000224 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
TREASURY PASS TO FEDERAL RESERVE 
 
E.O. 12356:  N/A 
TAGS: EFIN PREL PGOV GM
SUBJECT: GERMAN TAX DRAGNET EXPANDS AMID GROWING 
PUBLIC DISCONTENT 
 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION. 
 
¶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 
kept." 
 
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 
transparency. 
 
¶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 
elections. 
 
¶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. 
 
Comment 
------- 
¶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. 
 
TIMKEN, JR