What criminal clans and German family businesses have in common

This article first appeared in Handelsblatt on 19 February 2020.

Just a couple of years ago, some members of a Lebanese family were suspected of committing mafia-style crimes, including blackmail, drug-dealing, the theft of a giant gold coin (100 kg!) from Berlin’s Bode Museum, and the laundering of millions of euros through real estate investments. Remember? This story reminds the whole world that Germany has so far been in no position to mock countries shaken by embezzlement scandals, such as the recent Luanda Leaks in Angola. But that is not because of foreign family clans, but because of a much more German variant of family dynasties.

A large economy, internationally networked, legally secured, with a culture of secrecy and virtually no means of unmasking and punishing money launderers: criminals couldn’t dream of anything better. Every year, up to €100 billion are laundered in this country, according to an academic report written at the request of the Finance Ministry.

When illegal funds are laundered in the housing sector, they do not only risk financing mafias and terrorists, but they also contribute to rising rents and purchase prices. In Berlin, real estate transactions amounted to €11 bn in 2018, up from €3.6 billion in 2009, with rents for ordinary tenants exploding. Some of the demand driving up the prices is likely to consist of money of dubious origin.

That’s why we can only applaud the fact that, after years of denial, Germany finally seems determined to get rid of its reputation of being a “gangster’s paradise”. This is even the main piece of news coming out of the publication of the 2020 Financial Secrecy Index. According to the 2020 Financial Secrecy Index published by the Tax Justice Network, a UK-based thinktank of which I am a director, Europe’s leading economy managed to dramatically reduce its contribution to global financial secrecy, taking its ranking down from 7th on the 2018 index to 14th.

This improvement is mainly due to the adoption of the new European directive regulations into local legislation.  In response to the Panama Papers revelations,the European Union (EU) tightened its directive to counter money laundering within the European financial system. One important step is to unmask criminals that hide behind anonymous companies by the introduction, in January 2020, of registers of corporate ownership, showing who ultimately controls every company incorporated across most of Europe, and in theory accessible not only to the tax administrations and law enforcement, but also to journalists and civil society.

Few countries have complied timely with the new rules. Germany’s swift action is all the more impressive as it extended the obligation to disclose the names of the beneficial owners to foreign trusts and foreign letter box companies purchasing German real estate, going even further than the EU required. This decision was made despite intense resistance, particularly from the almighty German business dynasties. Speaking in the name of tradition, these huge so-called family businesses now threaten to defend their culture of secrecy at court. .

The Deutschland dynasties believe they do not have to reveal their profits, even though, in reality, many of them are now multinationals. And their counterattack has already begun. Last November, in a decision that the majority of citizens didn’t notice, Germany was, because of their lobbying, one of the 15 European countries failing to support a new directive that would require multinationals to reveal how much profit they make and how little tax they pay in each country they operate in. 

When multinationals and the super-rich manage not to pay their fair share of taxes, governments cannot invest in access to education, health care, and decent pensions, or take measures to mitigate and adapt to the climate crisis. Arguing that their coffers are empty, those governments opt for austerity measures, becoming more and more discredited in the eyes of the population, and fostering the kind of populist backlash that allows authoritarianism to flourish.

This dynamic also exacerbates gender inequality, because, in Europe just as in the rest of the world, women are overrepresented among the poor and among the demographic group with informal or low-paid jobs. In addition, they tend to take on a larger share of unpaid care work when social services are cut.

Germany must now prove that it is really willing to enforce its stricter laws. It will have the opportunity to do so in the coming months when faced with the experts from the Financial Action Task Force (FATF), the most important international body for the prevention of money laundering. Based in Paris, this organization examines every ten years whether states comply with international standards, and Germany’s audit will begin in April.

In 2010, the experts were unforgiving. Germany failed 20 out of the 49 criteria and according to observers barely escaped the body’s blacklist. To make them forget their last evaluation, Berlin should take bold steps: give its public prosecutors, police and supervisory agencies real resources to investigate, as well as annul old bearer shares that allow their holders completely anonymous ownership of companies despite all transparency registers.

With Brexit a reality, the risk now is that the UK may transform itself into a so-called “Singapore-on- Thames”, ie an even more harmful facilitator of financial secrecy, putting European countries’ efforts in jeopardy. But it is also an amazing opportunity. Outside the EU, the United Kingdom will no longer be able to block anti-tax haven measures from being adopted in Brussels, and to defend its satellite secrecy jurisdictions. Europe, and especially Germany, no longer has an excuse for not going further with transparency. German family dynasties finally have to let go of some of their cherished secrecy because it is this very secrecy that keeps criminals in business.