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TAX NEWS - 2010

L'Oréal trial: heiress Bettencourt's tax shelters

The trial of a photographer charged with trying to defraud L'Oréal heiress Liliane Bettencourt started today, but was suspended to examine secretly made tapes in which Bettencourt discussed tax shelters with an adviser. Disaffection with elite privileges is rising in France.
French celebrity scandals like the one now enveloping Liliane Bettencourt, heir of the L'Oréal fortune and the world's third-richest woman - are typically arcane soap operas of power, family, politics, sex, and money. Even by the standards of France, though, the Bettencourt affair is maxing the genre.

Ms. Bettencourt is in a ferocious dispute with her daughter over her fortune and her relations with celebrity photographer Francois-Marie Banier, to whom she gave more than $1 billion in gifts. Mr. Banier went on trial today, accused by Bettencourt's daughter of trying to defraud her mother.

But Bettencourt now turns out to have been secretly taped by her butler for a year, information that caused the trial to be suspended indefinitely. Banier's lawyer argued that it would prevent a fair trial for his client, who could face up to three years in prison. The tapes included talks with a financial adviser to hide $97 million in undeclared Swiss accounts from taxes - prompting Bettencourt to say this week she will open her books.

In Paris, this narrative of glamour and intrigue is oxygenated by $28 billion in wealth and politically incestuous overtones, since a key Bettencourt manager is the wife of a French minister, Éric Woerth, who is now championing belt-tightening policies such as raising the retirement age. She's now stepped down.

But one global aspect of the story is simple: an adviser and a billionaire discussing how to evade taxes that "ordinary" people have to pay. If true, analysts say, it highlights a crime that happens daily. And it plays into rising disaffection here with elite privileges.

Swiss accounts

In an Oct. 27, 2009 exchange, the adviser says, "We must arrange things with your account in Switzerland, we must not get caught before Christmas." Three weeks later, he says of a $65 million account, "I am in the process of organizing its transfer to another country, whether Hong Kong, Singapore or Uruguay.... Like that you will be safe."

Release of the tapes, in fact, took place on the same day the G20 in Toronto solemnly agreed to continue cracking down on overseas tax shelters. It comes as the US Congress is passing laws to report the identities and account information of Americans overseas.

In fact, the sheer scale of wealth in tax havens hasn't fully sunk in, analysts say. Contrary to public perception, abuse may be worse, not better, than after the 2008 economic crisis - when busting tax shelters became a temporary cause célèbre.

Wealth protected offshore is now estimated at between $7 trillion and $15 trillion. The figure is based on "high net-worth" individuals - not corporations. That's equivalent to a fifth or a quarter of world GDP, varying analysts say.

A 2005 figure by the Tax Justice Network, an international group of lawyers, scholars, and accountants found $11.5 trillion. "We think it is a low estimate," says John Christensen, director of TJN. "Most of us would be surprised today if the figure is lower than 15 trillion. Wealth management firms believe the high-net wealth category has recovered [from 2008], often with spectacular gains."

Jeffrey Owens, director of the Center for Tax Policy and Administration at the Organization for Economic Cooperation and Development, says $7 trillion is "conservative … but even $7 trillion is big," and says the higher estimates "could be possible."

He argues that international resolve to crack down means "the days of tax havens are coming to an end." Since 2008 Ireland has recouped $1.2 billion, largely from Channel Island shelters; Italy has taken in $6.8 billion; the UK some $600 million to $800 million.

Slow enforcement

Yet such figures and bold hopes pale in comparison with abuse. Some 534 bilateral agreements between states and shelters have been signed under OECD auspices since 2008. But enforcement is slow; information is by request and often late. Meanwhile, fortunes are folded into series of unregistered trusts, where accounts are opened on the third or fourth iteration of the trust, and become untraceable.

"The main problem is an incredible lack of transparency and information sharing," Mr. Christensen offers, adding that "individuals and corporations are using the same mechanisms" to hide money as organized crime.

Mr. Owens agrees "trusts are becoming more sophisticated, but we are catching up. The problem has been around a long time." The Swiss Parliament just agreed to give the IRS names of 4,400 American UBS bank account holders, a future model for coming clean.

But as havens like Switzerland, Luxembourg, Lichtenstein get tougher, new trusts are appearing in Singapore, Mauritius, Hong Kong, and Uruguay. Owens says new billionaires in China are looking to park money everywhere.

Nor, as he puts it, "is this at all a rich country problem." Up to half the wealth in Latin America is not taxed and offshore according to a World Bank study; the African percentage of offshore wealth may be higher.

In France, Bettencourt is under investigation. It isn't clear the L'Oréal heiress herself initiated criminal behavior.

"The Bettencourt story embodies the quintessential French paradox," argues Karim Emile Bitar, editor of the Paris journal ENA. "The French are very resentful of inequalities and privileges. They refer fondly to the "Nuit du 4 août" [in 1789, that ended the monarchy and abolished privileges]. At the same time, every French Tom, Dick and Harry tries to maximize and protect his own privileges. He wants to eradicate abusive tax shelter deals but would vehemently protest if the fiscal authorities investigate his own books too closely."
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