It was Heinrich Kieber, a disgruntled computer technician in Liechtenstein, who struck perhaps the biggest blow against the fabled secrecy of offshore banks when he sold a CD containing information on thousands of account holders to the German government, which then passed it on to tax authorities around the world.

For cash-strapped governments the data amounted to a treasure trove. For the first time, in many cases, it provided them with the ammunition they needed to deal with the problem of tax-haven banks.

With the help of Mr. Kieber’s CDs, the U.S. Internal Revenue Service went on to score an historic victory against Swiss banking giant UBS AG, which last year agreed to pay a US$780-million penalty and hand over information on 4,500 American holders of secret offshore accounts with an estimated US$20-billion in deposits.

The data breaches show no sign of letting up. Last week, HSBC disclosed that data on as many as 24,000 customers of its private-banking arm in Switzerland had been stolen by a former IT employee who passed it to authorities in France.

For the world’s major economies it’s open season on tax havens and the clients who flock to them.

Most of the action has taken place a long way from Canada, but the Canada Revenue Agency is paying close attention.

In 2008, the CRA disclosed that it had acquired a list of about 100 Canadian holders of accounts with LGT Bank in Liechtenstein, and last year it went to court to compel Royal Bank of Canada to provide information relating to bank customers thought to be hiding money in LGT.

Caitlin Workman, a spokeswoman for the CRA, said the process with RBC is “moving forward.”

“The government is confident it will be able to ensure that all of the individuals on whom we have requested information fulfill their Canadian tax-reporting requirements,” she said.

The CRA is also talking with UBS regarding reports that it marketed offshore services to well-heeled Canadians. But Ms. Workman declined to comment on the discussions, saying only that “Canadians holding accounts with UBS AG continue to come forward to regularize their tax situation with the CRA.”

According to CRA statistics, 2,562 people have taken advantage of a voluntary disclosure program to reveal nearly $600-million in offshore income since May, 2009.

That’s up substantially from the previous 12-month period, when 1,858 people came clean on $100-million in previously unreported offshore revenue. The voluntary disclosure program allows people to avoid penalties or prosecution by coming forward to disclose hidden assets.

“This is a massive issue,” said Matthew Wall, a corporate tax consultant in Toronto, who speculates that the use of offshore accounts to hide income is a lot more pervasive than many believe.

Historically, offshore bank accounts were the preserve of the wealthy. But with the rise of the Internet, the barriers to entry into the offshore world dropped, along with the price, as it became possible for virtually anyone to open an online account in a foreign bank.

Suddenly, the flow of money into Liechtenstein and other tax havens became a flood, much to the alarm of governments. But if the technology made it easier for offshore banks to market themselves, it also created a massive vulnerability.

When banking records were stored physically under lock and key, the offshore banks and their customers were practically impenetrable by data thieves. But with the advent of digitization that protection disappeared. Now it was possible for individuals to easily copy and remove huge amounts of data.

Observers say the cozy world of offshore banking is undergoing huge change as the United States, Britain and other major countries put pressure on tax havens to lift the veil of secrecy on tax-dodging customers.

The Organization for Economic Cooperation and Development, which represents 30 developed economies, estimates that offshore banks globally hide some US$5-trillion to US$7-trillion from tax authorities, or about 8% of total global assets under management. The OECD has been a driving force in the battle to lift the veil of secrecy on tax havens.

The U.S. government estimates it loses US$100-million a year in tax revenue because of undisclosed tax-haven bank accounts. The CRA is reluctant to provide an estimate, but according to evidence unearthed by a U.S. senate subcommittee looking into the matter, UBS’s private banking arm in Switzerland had accumulated about $6-billion of deposits from wealthy Canadians.

While UBS is one of the world’s largest wealth managers, it’s still just one bank and there are many others that are believed to be active in Canada. Indeed, only a small minority of those taking advantage of the voluntary disclosure program involve UBS, according to the CRA, which has not identified the other banks involved.

Beat Guldimann, who headed up UBS Canada from 1997 to 2001, cautions against drawing too many conclusions from the U.S. evidence, arguing there is no proof that the nearly $6-billion in Canadian-owned accounts was not declared.

“To equate a percentage of that as income-tax evading is almost impossible to do,” said Mr. Guldimann, currently the owner of Tribeca Consulting Group, a Toronto-based wealth management firm.

To say that the entire amount is hidden from the government is “guesstimating,” he said.

Nevertheless, he concedes that the actual figure is likely in the billions of dollars rather than millions.

According to evidence presented to the U.S. senate subcommittee on Investigations of the Committee on Homeland Security, UBS had a dedicated team of Swiss-based bankers whose job it was to drum up business from well-heeled Canadians looking to hide assets in offshore accounts.

In the wake of the U.S. revelations, CRA officials have sought to question executives from the Swiss bank, but so far those discussions have yielded little.

Mr. Guldimann said that while he was aware that some of his colleagues in Switzerland were doing business in Canada, there was a Chinese wall between Canada and outside of Canada. “There was also bank secrecy, so you have no access to the numbers in Switzerland.”

As for the matter of Canadian regulations preventing unregistered foreign banks from marketing to Canadians, he said it was a grey area.

“I didn’t judge these activities as being suspicious or illegal or problematic or whatever.… I don’t think there were any regulatory issues that were popping up at that time,” he said.

But the bottom line is that the CRA is taking a much more aggressive attitude toward tax haven banks. There are two reasons for that.

First, just about every government in the industrialized world is facing massive debt as a result of bank bailouts and other measures taken during the financial crisis, and they need to start paying it off. Canada is no different. Raising taxes is always a politically unpopular move, so it’s almost a given that the government is looking with renewed interest at tax dodgers.

The second reason for the CRA’s new attitude is more interesting.

For years, tax havens such as Switzerland and Liechtenstein closely guarded the privacy of their banks. Such policies made it almost impossible for foreign governments to collect evidence on tax dodgers, while at the same time helped build the reputation of offshore banks as a safe place to hide assets.

But now that the OECD and member nations have been working together and sharing information to unveil tax havens, the field has tilted in their favour.

“Basically, [the CRA is] the recipient of huge amounts of information because with all these agreements, especially with the Americans, the Brits, the French and the Germans, they feed information to each other,” said Paul DioGuardi, senior partner at DioGuardi & Co., a tax law firm in Toronto.

“Before, what would happen was governments would say, ‘unless we’re getting money out of [investigations of offshore banks], we won’t bother dealing with these things.’ But now they realize there is a common threat and they’ve banded together. The Swiss banking system is now like swiss cheese, there’s no secrecy there any more.”

As a matter of policy, the CRA says it does not pay whistleblowers for information, but that doesn’t matter any more. Because of OECD agreements, it now gets the information from other tax authorities that have no such limitations. For instance, when Mr. Kieber sold his CDs to the Germans, the Germans turned the disks over to their OECD partners, paving the way for a worldwide crackdown that shook the Liechtenstein banking establishment to its core.

And well before HSBC admitted that data on thousands of account holders at its private banking arm in Switzerland had been compromised, Ottawa officials were in talks with the French tax authority, which reportedly bought the information from a rogue HSBC employee.

Financial Post

jgreenwood@nationalpost.com