Offshore Investigating: on Bank Julius Baer and Wikileaks

Now that a federal judge has cleared to have its domain restored, it perhaps might behoove the free information zealots to actually look into the substance of the story which instigated the takedown. Bank Julius Baer, a Swiss bank, has a Cayman Island subidiary apparently serving as a tax shelter for the rich: Perhaps top reporters are working on it? Or do they just consider it a business-as-usual story?

The Guardian‘s February 23 article was excellent, as the reporters didn’t just look at the free speech issues, but they looked at the data as well. Unfortunately, it’s had to compete for attention with hundreds of other news items and blog posts. I myself had trouble finding a clean summary of it. So I spent an hour reading up on it and updated the Wikipedia entry on Julius Baer Group. And then I spent ten more hours getting to the real story.

First I should point out the obvious warning of wikis: the unpredictable bustle of change. Wikilieaks is no different. The first of its three-part investigation into BJB, Grand Larceny via Grand Caymans has had some thirty edits since it was posted on Friday. Just last night an organization chart of the bank was added at top. And one of presumptive authors, Andreas Missbach of the Bern Declaration, was removed from the byline. Daniel Schmitt (authoring articles in German and English) and Julian Assange, Wikileaks advisory board member, still share the byline with Rudolf Elmer, the former Julius Baer who has provided much of the source material for the story. All of these changes were made by a user named “Wikileaks.” Apparently, transparency requires a degree of opacity. [see followup, Wikileaks is a Little Dangerous.]

Here’s how I can summarize it now:
The Cayman Islands have $500 billion in assets in some 600 banks, and Bank Julius Baer is one of them. The COO of its Cayman subsidiary was Swiss national Rudolf Elmer, whose responsibility, among others, were being able to transport the backup tapes off the islands ahead of hurricanes. He was terminated in 2002 after suspicions that he had removed bank files from the office outside of procedure. Ironically, it was his termination which led him to be in the possession of files to the present day. He explained on wikilieaks: “My employment contract was been canceled while I was on holidays in the hospital in Zurich for a spinal surgery. Therefore no one has asked for this data.” (Also, incidentally, it was his back pain for the surgery which frustrated his participation in a polygraph test, according to 57 pages of documents he later posted to Wikileaks.)

Whether the original misplaced files overlap with the documents he eventually carried out has not been clarified (and probably won’t be). In any event, some of leaked documents were forwarded to the media in June 2005; their existence was thusly reported in the Swiss financial magazine Cash, we well as in the Wall Street Journal. In April 2007, someone began sending this information to the German tax authorities. (according to Financial Times Deutschland).

If there were a smoking gun to this, none of the financial journalists who have had this story for years have found it. Last December, Rudolf posted to Wikipedia a collection of documents related to his complaint against BJB (he asserts they have had him and his family under surveillance). By January, specific details regarding the leaked accounts were posted to Wikileaks.

Some press accounts claim that Elmer denies leaking these document. But this is based on a gross misunderstanding of the following sentence, presumably authored by Daniel Schmitt in Clouds on the Cayman tax heaven: “Rudolf Elmer to this day claims he has not leaked any documentation related to Bank Julius Baer in order to harm anyone, only setup an insurance for his and his family’s personal safety.”

Whether those account holders are harmed by exposure remains to be determined. Ten individuals are presently named in Wikileaks One U.S. resident in this list is Winston Layne of West 86th Street, New York City. Wikileaks states, without connecting the dots of evidence: “Mr Winston Layne unfortunately committed tax fraud and the IRS is after him in order to make him responsible for his wrong doing.”

Another is Lord Lawrence Kadoorie, the legendary Hong Kong magnate (“taipan”) who amassed a personal fortune of $4 billion through China Light & Power (CLP). Kadoorie (a British subject of Iraqi Jewish descent) died in 1993, a year after handing over many responsibilities to his son and other sucessors. Wikileaks presently offers this alternate history: “This information is politically important because the estate of Lord L. Kadoorie disappeared in Swiss Banks. The children, Michael, son, the daughter Rita and the younger rother Horace did not know where part of the tremoundous estate disappeared… The audience is the people of Hong Kong and the family Kadoorie because they are searching for the money.”

This is also attributed to “Wikileaks”, but it is clear that person has less ability with English than Schmitt or Elmer. Nor has this person even read the Kadoorie file that they posted. The people of Hong Kong may indeed desire this money to reside in local banks, but the family Kadoorie doesn’t see this money as missing— the names on the purported bank documents are CLP officers!

The files include unnecessary private details caught up in the dragnet, such as Winston Layne’s will. Still, they appear to show a pattern of the account holders’ direct involvement in the investment of the assets. Under U.S. tax law, that disqualifies an investment as being “offshore” and thus must be taxed at U.S. rates.

Abusive tax shelters have earned the enmity of both major political parties in the United States. This often manifests more in rhetoric than in action. During the 2004 campaign, President George W. Bush told his suppoerters on multiple ocassions: “the rich hire lawyers and accountants for a reason, to dodge the tax bill and stick you with it.” Perhaps this led to the Treasury Department requesting an additional $300 million for fighting illegal tax shelters the next year.

If President Bush really wanted to eliminate abustive tax shelters, the Democratic Congress would be more than accomodating. In each of the last several sessions of Congress, Senators Carl Levin and Norm Coleman (alternating as chairmen of the Finance Committee) have introduced bills (most recently S.681) to reform the tax shelter laws. With small variations, these have generally called for a complete reversal of how the law presently applies: going forth, all offshore tax shelters would be presumed as controlled by the taxpayer, and taxable as U.S. income, unless the taxpayer can prove otherwise. [The bills have never gone as far as a committee vote.]

In the U.S. the Internal Revenue Service has its hands full with individual tax cheats. But they find it much more cost effective to go after the source — investigating the promoters and enablers of tax shelters. In 2002, Michael Hamersly blew the whistle on KPMG’s tax shelter practice; in 2005, the accounting giant settled with the Justice Department for $456 million.

Elmer’s focus, naturally, is on the source as well– Switzerland and its banking industry. His former employer committed two wrongs. One, as he interprets Swiss law. the Cayman branch was never independent in order to be exempt from Swiss tax rates. Elmer testifies that all decisions were made in Zurich, and it was left up to the local office to enter the decisions into the local system hours later. Second, Elmer argues that according to Swiss law, such whistleblowing is impossible. Despite his offers to turn the data over to the prosecutors, the Zurich canton still treats the account data as privileged and inadmissable as evidence.

The evidence paraded on Wikileaks has inspired separate doubts from BJB. In their press release, BJB called the files “stolen and forged bank records.” [emphasis added] Spokesman Martin Somogyi elaborated in a comment to Reuters: “They have been manipulated in terms of names and dates.”

This has flummoxed the Slashdot community, who felt that BJB was contradicting itself. But a look at the zip file makes clear exactly what the bank is talking about. Some of the files have names modified from the original– the editor supplied some descriptions to the files. In addition, the last modified date has changed.


When we look at the document itself we see that it was modified long after its creation date. Notice the name.

Unfortunately, this introduces some reasonable doubt that the evidence may have been tainted. According to the U.S. Department of Justice’s Cybercrime resource on obtaining electronic evidence, “specific evidence of tampering” is needed before considering that a document may have been altered. This might qualify, I don’t know; most certainly Elmer would have to explain how it was that “Rudolf” altered these files, and why he did.

(And a lesson to anyone else seeking to turn state’s evidence — take better care not to leave your fingerprints on it.)

Obviously, Rudolf Elmer is aiming to air these issues to a larger court, the court of public opinion. And he is right to do so. The question is how. It it clearly not enough today to create a blog on it. Writing an article for the Nation or Mother Jones might not reach anyone outside the converted. And having read the underbelly-of-capitalism memoir Confessions of an Economic Hit Man, I look forward to Confessions of an Offshore Swiss Banker

But getting the information on Wikileaks, and tempting BJB to sue in U.S. Court enabled the story to reach the wider community of free information zealots. Whether they make anything of the story is another matter.

Update, March 8: Indeed, as the unnamed reader points out in the comments, the document saves are within minutes of each other, so it is likely that they are innocent. Still, the person who re-saved the documents should explain them. I sent an email to an address listed for Rudolf Elmer last week; I have not heard back. 

Also, strangely, this article is now ranked #3 for Rudolf Elmer, #5 for Bank Julius Baer (above Slashdot!) so I am obliged to update it. I am still unable to make a judgment as to whether named individuals are guilty of tax evasion. But I can comment on the media aspects. As I expected, the attention to the substantive parts of the story continue to be overshadowed by the free speech aspects– particularly now that BJB dropped the lawsuit. The Economist opined on Internet governance, not on the tax shelters. Forbes wrote about this and the continuing tug-of-war between Elmer and BJB on Thursday, but they didn’t trouble themselves to go through the documents. My sense is that a reporter would be less inspiredlook into the over-publicized Wikileaks trove than had they been privately leaked. Despite the calls for “pro-am” investigative journalism, stories are often better hyped by editors if they are “exclusive.” That’s the nature of the news business.


These modifications are innocent

Look at the timestamps. They are all within minutes or seconds of each other. So someone (rudolf?) has just copied or saved these in a big batch and no sort of sophisticated tampering could have been done so quickly.

There are instances elsewhere someone (rudolf?) has put highlight on the alleged wrongdoing, or changed the name of the file to make it less opaque. These are also harmless changes and I’ve spotted no others.