Gucci: Made in Switzerland

The commando sweep hit Gucci at its heart. On 29 November 2017, officers from the Guardia di Finanza burst into the HQs of the swanky luxury brand in Florence and Milan, and launched a three-day search.

At the same time, the homes of Gucci's top managers were raided by investigators, while the CEO, Marco Bizzarri, was picked up by police at the Park Hyatt Hotel in Milan.

These raids were part of a tax fraud investigation into Gucci by a Milan prosecutor.

He accused the 97-year old label, a subsidiary of French group Kering, of evading 1.3 billion Euro in taxes over seven years by shifting its profits to Switzerland, through a scheme involving letterbox companies in Luxembourg and the Netherlands.

Today, confidential documents obtained by Mediapart, and passed to The Black Sea and their partners in the network European Investigative Collaborations (EIC), show that this is not just a Gucci affair, but also envelops mother company Kering on a massive scale.

Our revelations raise the question of the responsibility of the Pinault family, who have the controlling share of Kering and the fifth largest fortune in France, with 19 billion Euro in wealth. This is a family legacy, as founder François Pinault was succeeded by his son François-Henri as Kering CEO in 2005.

According to our information, the group has evaded around 2.5 billion Euro in taxes since 2002, mainly to the prejudice of Italy, but also France and the United Kingdom. This is one of the largest cases of alleged tax evasion in Europe.

After buying Gucci in 1999, Kering's tax avoidance system spread from the Italian group to its luxury brands Bottega Veneta, Alexander McQueen, Stella McCartney, Balenciaga and Yves Saint Laurent. The Saint Laurent house alone avoided the payment of around 180 million Euro of taxes in France.

At the top of the scheme are two shell companies with no major activity, in countries with more favourable tax regimes than Kering's bases in the UK, France and Italy: Kering Holland and its subsidiary Kering Luxembourg.

The latter owns four companies in Switzerland, in the Italian-speaking canton, or region, of Ticino. These distinct companies are suspected of being a single entity - a piggy bank filled with billions, designed for reducing taxation.

The scheme was first revealed in 2016 in an investigation made by Swiss NGO Public Eye. The operation started in 1997, when Gucci set up Luxury Goods International (LGI), with a warehouse in Cadempino, a small Swiss town of 1,500 in the outskirts of Lugano, just across the Italian border.

After its sale to Kering in 1999, Gucci made LGI its exclusive logistics center. All the brand's products, mostly made in Italy, have passed through Cadempino since then, before being delivered to stores around the world.

The warehouse has a great position, just off the highway, only 90 minutes from Milan by truck. But this is not the reason that attracted Gucci. According to our investigation, the group negotiated with the canton of Ticino a tax ruling that allows the multinational to pay only around eight per cent corporate tax - almost four times less than the Italian rate of 31 per cent.

Gucci granted LGI, through a licensing agreement, not only the monopoly of the distribution, but also of the sale of its products to all retail outlets merchandising Gucci. So LGI receives the overwhelming majority of the revenues.

When Kering took control of Gucci, the group built on the profitability of this scheme. Therefore all the fashion brands of Kering joined the system: Italian leather goods brand Bottega Venetta, British fashion houses Stella McCartney and Alexander McQueen, and Yves Saint Laurent and Balenciaga in France.

The growth has been so high that Kering opened two other warehouses in Ticino. The latest in Sant'Antonino, Ticino, is a huge pink and grey building the size of three football fields, that can deliver 2,000 packages per hour. On the facade, there is no clear sign that indicates the identity of the owner. Yet the warehouses receive a ceaseless parade of trucks filled with dresses, shoes and handbags.

“It's the Kering effect in action, from Sant'Antonino to the whole world,” said Jean-François Palus, managing director of Kering and president of LGI, at the warehouse opening in 2014, quoted in Coriere di Ticino. This 'Kering Effect' is spectacular: according to EIC’s investigation, LGI has achieved a cumulative net profit of seven billion Euro between 2009 and 2017 alone - almost 70 per cent of Kering's profits.

But the group employs only 600 people in Switzerland, less than three per cent of the total employees in its luxury division.

As a consequence, the group has saved around 2.5 billion Euro in taxes since 2002. Meanwhile this has enriched the canton of Ticino, which has picked up more than 600 million Euro in taxes.

Kering is not the only name to take advantage of these lucrative deals with Ticino. Other luxury giants, such as Armani, Hugo Boss and Versace, as well as The North Face, have set up their logistics centres near Lugano for the same reasons. It has become so extensive, that the area even has a name: 'Fashion Valley', even if this is no more than a strip of warehouses and truck stops.

Although the tax agreements are confidential, the canton of Ticino has admitted in an official document that 'Fashion Valley' has represented its largest source of income.

For the Swiss NGO Public Eye, this is a tax piracy to the detriment of other European countries. It is “shocking that fashion multinationals accumulate millions of profits each year by using such tax schemes,” while “those who manufacture their products in the factories of their suppliers and their subcontractors receive miserable wages,” writes Public Eye in its report on 'Fashion Valley'.

Gucci and its CEO Marco Bizzarri did not answer our questions. Contacted by EIC, Kering said in an email that the Swiss company LGI operating the tax scheme “is a major commercial distribution and logistics platform and a major industrial site”, which “has an effective economic activity directly related to the commercial activity of the group's brands”.

Kering adds that LGI's situation “is well known to the Swiss, Italian and French tax authorities”.

But the Milan prosecutor argues the scheme is too artificial to comply with the model tax convention of the Organisation for Economic Co-operation and Development (OECD). Officially, LGI sells all the products, but the bulk of this work is carried out by Kering's employees in London, Paris or Milan.

It is difficult to claim that Swiss warehouse staff, even if they were the most efficient in the world, are responsible for 70 per cent of the profits of some of the most prestigious global brands. In business, logistics is an activity of low value and a cost center. It is usually paid just enough to allow the warehouses to cover their expenses and make a small profit.

In the Kering system, the opposite happens. The Swiss warehouses are the source of wealth, which pays out money to Gucci or Yves Saint Laurent, giving the historical luxury houses almost the status of contractors.

The result is that Gucci has paid only 100 million Euro taxes in Italy from 2013 to 2016 - instead of the 650 million Euro if LGI's profits had been taxed south of the Swiss border.

But this alleged fraud does not stop only at the products, it also concerns Gucci's management.

To justify paying taxes in Switzerland, Kering fictitiously transferred around 20 Gucci executives to Swiss companies and employed them with Swiss work contracts, even though they were still working in Milan. The example came from the top. As The Black Sea and EIC have already revealed, the CEO, Marco Bizzarri, has benefited for seven years from a dubious Swiss tax residence.

Most of these executives became employees of Luxury Goods Services (LGS), a Swiss shell company registered at the same address as LGI. It has no activity, except hosting the “transferred” executives. LGS is chaired by Béatrice Lazat, Kering's director of human resources – a clear sign that the operation was supervised from the group's headquarters in Paris.

Kering made a big effort to give credibility to these transfers. The group assigned Swiss e-mail addresses (@ch.gucci.com) to these employees. According to a witness interviewed by the Italian police, the group also provided them with company cars with Swiss license plates and Swiss mobile phones and encouraged them to transfer their personal residence to Switzerland.

Kering set up this offshore circuit with a system to repatriate the huge profits earned by this Swiss cash machine. The Swiss companies belong to Kering Luxembourg, which is a subsidiary of Kering Holland, registered in the Netherlands. The group CEO François-Henri Pinault has been a director of Kering Holland for fifteen years.

Kering Luxembourg also owns several operating companies of the group's luxury division. It recovers the dividends paid by LGI and manages the cash and internal financing that the subsidiaries need under the Luxembourg tax regime. This is a classic of tax optimization. The surplus is then transferred to Kering Holland, which can redistribute the money net of taxes.

These two companies seem to have the sole objective of benefiting from tax advantages on international financial operations offered by the Grand Duchy and the Netherlands. But Kering denies this allegation, and states that these structures “do not provide a tax benefit to the Kering Group”.

But these Dutch and Luxembourg operations certainly look like shell companies.

Kering Luxembourg, whose directors are a local tax advisor and several Kering executives, is registered in a shared office center, where it rents 22 square meters with only three desks. Most of its activity and its 13 employees are housed in Cadempino, in the same building as LGI. Kering disagrees. “It is incorrect to say that Kering Luxembourg SA has no activities or employees in Luxembourg,” says the company.

Meanwhile in the Netherlands, Kering Holland is housed on the 13th floor of a skyscraper in the south of Amsterdam called 'Rembrandt Tower'. This is the former Gucci Group NV, which Kering bought into in 1999, renaming the firm Kering Holland.

According to our investigation, Kering Holland is managed from Cadempino and operates with Swiss accounts in a bank in Lugano. According to financial statements filed in 2013, the company has only one employee in the Netherlands - a Dutch administrative assistant named Nicole Plieger.

During our on-site visit, the receptionist in the lobby of the Rembrandt Tower forbade us to go upstairs to the 13th floor, and told us that she had not seen Kering Holland’s employee come to the office that day. We called Plieger shortly thereafter, who said that she was the “manager”.

And the only employee?

“No that’s not true. We’re three in here.”

Could she tell us why Kering Holland is based in the Netherlands?

“Noooo, I’m absolutely not going to give you an answer to that,” she said, “because we are prohibited to do that. I don’t know if you want me to lose my job?”

The case is shocking because Yves Saint Laurent and Gucci are booming, and with 15.5 billion Euro in revenue and an operating profit of 2.9 billion Euro last year, the Kering group could easily afford to pay taxes in the countries where it undertakes the bulk of its work.

Kering itself seems to have felt that this situation was becoming delicate for Gucci. On 5 October 2016, its CEO François-Henri Pinault resigned as co-director of Kering Holland. This came six months after the opening of a first criminal investigation in Italy on Kering's real estate business, which led the investigators to discover the tax scheme.

Another director resigned from Kering Holland the same day as Pinault: his close collaborator Patricia Barbizet, vice-president of the board of Kering.

Yet another key man fled too: Jean-François Palus, the deputy managing director of Kering and right-hand man of François-Henri. At the end of 2016, he abandoned the risky position of chairman of LGI, the Swiss cash machine at the heart of the tax scheme. He also resigned as a director of Kering Luxembourg in July 2017.

Finally, there is Gucci boss Marco Bizzarri and his dubious Swiss tax residence.

“He is an Italian citizen and complies with tax regulations of his country,” François-Henri Pinault told Le Monde after our first revelations. But Pinault forgot to say that the CEO of Gucci has regularized his situation only last year - and had to pay a large sum to the Italian tax authorities, according to a source close to the matter.

Until the end of 2017, an Italian law granted the amnesty of criminal prosecution and exemption of penalties to the taxpayers who voluntarily came back home. Did the CEO of Gucci become an Italian resident again because he was afraid of the criminal investigation?

Story investigated by Yann Philippin (Mediapart), Vittorio Malagutti (L’Espresso), with a contribution from Esther Rosenberg (NRC Handelsblad)

This version by The Black Sea

Photo credit Swiss Road to Italy/Pinault: Shutterstock