What reads like a spy novel has led to the arrest of Deutsche Post head Klaus Zumwinkel (who since stepped down), so far the most prominent, but reportedly only one of hundreds of suspects who are accused of having used banks in the small and discreet tax haven Lichtenstein to forgo German tax claims. The arrest of Zumwinkel, who is accused of having evaded $1.5 million in taxes, has shocked the country as the former Post manager had previously been regarded as one of Germany's most respected chief executive officers.

The infamous CD is believed to contain evidence on several billions that have been funneled through Lichtenstein banks and bogus charities. Police on Monday and Tuesday embarked on nationwide raids that included homes and offices in Munich, Hamburg, Frankfurt and Ulm. In total, some 900 properties will be searched over the coming days.

What makes this case special is the fact that Germany's Federal Intelligence Service, or BND, was intimately involved in the investigation. The BND has managed to recruit excellent sources within Lichtenstein banks and has been conducting espionage operations in the principality since the beginning of the decade, the Berliner Zeitung newspaper reported.

The BND also mediated the German Finance Ministry's $7.3 million acquisition of the CD from a former employee of the LGT Group -- a Liechtenstein bank owned by the country's ruling family, the Financial Times reported.

While the Finance Ministry defends the deal, saying it will result in several hundred millions of dollars in back payments, the sale remains controversial, as a government agency has paid for possibly stolen data.

Ferdinand von Schirach, a lawyer, told German news channel n-tv the move was legally highly questionable.

"The German government has used tax money to pay for a crime by a citizen of Lichtenstein. That can't be. That's illegal."

Lichtenstein's ruling Prince Hans-Adam II has also harshly attacked the German government for what he feels was an "attack" on his principality.

"Germany with its attack on Lichtenstein does not solve the problems it has with its tax payers," he said, adding that paying a criminal for stolen data was against the law.

Lichtenstein, a landlocked alpine principality with just 35,000 citizens, has made a name for itself as a discreet tax haven. Bordered by Switzerland to its west and by Austria to its east, Lichtenstein is one of the few countries in the world with more registered companies than citizens and has, like Switzerland, laws that protect bank customers from outside governments.

That irritates Germany's conservatives.

"It's simply unacceptable to have tax havens in Europe that encourage capital flight and incite tax fraud," Ronald Pofalla, a senior conservative, told a Berlin news conference. "We must ensure that such refuges are shut."

German Chancellor Angela Merkel said she would urge Liechtenstein's Prime Minister Otmar Hasler to introduce greater transparency in Lichtenstein on financial issues. Hasler is due to arrive in Berlin Wednesday.

"The country's reputation is at stake," Merkel Monday told the foreign press corps in Berlin. She also acknowledged that Lichtenstein had made progress over the past years, adding that this "gives me hope that we can sort out what is outstanding."

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