Tackling offshore requires effective information exchange from secrecy jurisdictions

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I have suggested that if we are to reform offshore we have to start at home, and yesterday detailed a programme of reform that many governments would have to undertake if they are to set appropriate standards of transparency.

I’d expect all secrecy jurisdiction governments to make the same commitments. Nothing less will do. That is therefore the first part of any programme of reform they must undertake, in my opinion.

That then leads to the question of what is needed in addition to this programme in secrecy jurisdictions? The answer is a commitment to real information exchange. Not Tax Information Exchange Agreements, which do not and cannot work to solve the problem of opacity in the offshore world (for reasons explained here) , but real information exchange.

I have outlined a comprehensive, but workable basis for this in a report I wrote last year. In it I said:

The key concern when tackling capital flight is the illegal, disguised nature of the illicit fund flows. Ignoring transfer mispricing, the key mechanisms used for this illegal purpose are offshore financial structures such as trusts, companies and foundations.

There is at present no automatic information exchange with regard to such structures within the EU, let alone elsewhere.

The automatic information exchange arrangements which currently exist relate only to interest income paid to accounts held in individual’s names. The European Union Savings Tax Directive (EUSD) is the key example of this arrangement.

Suggestion has been made that the EUSD should be extended to developing countries. If and when the EUSD is extended, as the Commission plans, to trusts and companies in offshore locations this might provide some benefits if extended to developing countries but in its current form the EUSD is unlikely to do so: it is quite unlikely that significant deposits resulting from illicit financial flows are held in individuals own names. It is relatively easy, and cheap, to set up trusts and corporate structures that can hide these flows from view.

This does, however, suggest exactly what information is required to trigger an effective information exchange request by a developing country. Those countries do not need to know the precise details of interest, profits, gains or other income accruing to offshore structures created by, owned by, or which benefit people resident within their jurisdictions to enable them to make an effective enquiry under a tax information exchange agreement. They simply need to know:

   1. That such a structure exists (a bank account qualifying by itself as a structure for this purpose);

   2. What each component (trust, company, or foundation) is called;

   3. Who manages it;

   4. Where it banks;

   5. Who in their jurisdiction benefits from it.

If this data were available it is likely that almost every country in the world could and would substantially increase the number of tax information exchange requests that they might make using the proposed network of Tax Information Exchange Agreements.

What is therefore required is that this information, which the regulatory authorities of every single jurisdiction subject to IMF /FATF regulation must have available to it, be automatically exchanged with the jurisdictions in which the beneficiaries of those structures are located; that location to be identified by both the place of main residence of a beneficiary and by the country which issues them with their passport (with those places issue passports of dubious repute to be specifically blacklisted for anti-money-laundering identification purposes).

If this data were to be automatically exchanged then no further information on income need be exchanged, at least in the early stages of any information exchange process. That is because sufficient data to firstly disincentive use of such arrangements and secondly to allow information exchange requests to be made would exist. Pragmatically, that is most of what is desired of the automatic information exchange process. This does, however, have the benefit of massively reducing the risks inherent in automatic data exchange by removing entirely from that process, at least in its initial stages, any reference to specific income details.

At least in principle many developing countries should be able to make matching information exchanges in return for receipt of this data but in practice if statistical data suggested it very unlikely that illicit funds flow through a location (as opposed to originating from a location), as will be true for most developing countries, it is suggested that the exchange of information might be made optional under any automatic information exchange agreement of this sort, and that automatic data exchange in the first instance only be required from designated financial centres to designated recipient jurisdictions.

This then requires:

   1. A secure delivery mechanism for distribution of the data;

   2. A robust channel through which subsequent enquiry can be made by developing countries of the jurisdictions in which such structures are located as to their use, and about the quantum of the funds flowing through them.

It is obviously possible for information to be sent directly between jurisdictions in such a process of automatic information exchange. Since the data exchanged would include no financial information the file format for exchange purposes should be relatively easy to agree. The following would appear to be necessary data that must be exchanged:

   1. Full name of person about whom data is being supplied and their:

      a. Date of birth;

      b. Gender;

      c. Passport number;

      d. Residential address;

      e. Tax identification number (if known);

      f. Previous names (if known).

   2. Details for each structure about which information is being supplied:

      a. Name of entity;

      b. Type of entity (bank account, trust, company, foundation, etc.,);

      c. Entity registration number (if it has one);

      d. Date entity created (if known);

      e. Address at which entity considered to be located;

      f. Name of those managing the entity;

      g. Known relationship between this entity and other entities (e.g. a trust might declare companies in which it has an interest, a company might declare the trust considered to own it, a bank account might be linked to the organisation or person in whose name it is operated, etc.,);

      h. Relationship between the entity and the person for whom disclosure is made

(settlor, trustee, director, enforcer, ultimate beneficiary, beneficial owner, etc.,);

The technical processes involved are relatively straightforward to resolve compared to those required to define the nature of income which may, or may not, be subject to information exchange, especially given that the problems of associating entities of the sorts noted with the ‘warm human beings’ who benefit from their existence have now been widely addressed for anti-money laundering purposes.

If such information could not be sent directly then the Financial Action Task Force / Board appears an obvious intermediary given its role in the anti-money land erring area, to which this data relates. The World Bank or IMF appear to be other obvious intermediary custodians of data for exchange purposes.

With this data Tax Information Exchange Agreements become meaningful: the ‘smoking gun’ required to make them useful would exist. There does, however, remain the problem of negotiating the necessary thousands of such exchange agreements, all of which will be remarkably similar. There appear to be two options to speed this process:

   1. That each jurisdiction likely to receive information requests make available a standard Tax Information Exchange Agreement that can be agreed with any applicant, subject only to assurance that the recipient state will not abuse the data sent to it, or:

   2. A multilateral Tax Information Exchange Agreement be made available.

Of the two options the former seems more realistic subject to the OECD approving the standard TIEA made available by a jurisdiction. There is no suitable multilateral agreement in operation at present.

I believe this is the workable basis for future information exchange. And it is entirely deliverable without endless debate on what constitutes income for the purposes of any tax — because no information on income is ever exchanged under this suggested arrangement. Everything that is exchanged is already in existence — as required for money laundering purposes. That’s the beauty of what I suggest. And that’s why any secrecy jurisdiction should be able to deliver it, now.

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