One of the most significant developments for IFCs over the past
decade and a half has been the application of new compliance
regulations. In the coming decade, the interpretation of these
rules will have a profound effect on governments, IFCs, their
clients, and the economies of the jurisdictions that serve
them.
Corporate Tax Changes Are Seis…
The bevy of recent legislation passed—including the
OECD's Common Reporting Standard (CRS), the Financial Action
Task Force (FATF) recommendations, Foreign Account Tax Compliance
Act (FATCA) from the US, the Economic Substance requirements from
the EU, the People with Significant Control public register in the
UK, and more—have come in part as a result of changing
attitudes to wealth after the global financial crisis, but also due
to public pressure on legislators after information surfaced about
tax evasion schemes, many of which occurred years prior to the
disclosures fanning the flames.
In our Vistra 2020 report, which drew on the insights of 800
corporate services industry professionals globally last year,
nearly three-quarters said they are increasing investments in
compliance. Many have already cleared the bar for adherence to the
highest international standards. Though the populist backlash
continues, the industry as a whole is now highly regulated, highly
compliant, and more transparent than ever.
An Uneven Playing Field
New regulations have proved burdensome even for large countries
with considerable resources, so it's no surprise that some
smaller offshore jurisdictions struggle to keep up. In addition to
fulfilling previous know-your-customer, recordkeeping, and anti
money laundering requirements, IFCs must now provide to authorities
additional information about businesses, including account
balances, interest, dividends, asset sales, and other details.
Some might have expected smaller jurisdictions to be out of
business by now. Yet despite the additional scrutiny they receive
as being "offshore", most have survived, and some are
thriving. In the Vistra 2020 report, industry participants ranked
both the British Virgin Islands (BVI) and the Cayman Islands among
the world's top 10 jurisdictions—right alongside the
larger and more sophisticated finance centres of the US, Hong Kong,
and Singapore.
One tactic that has helped is the ongoing development of
specialties and 'trade routes' with other regions. The BVI,
though still dogged by memories of the Panama and Paradise Papers,
remains attractive for new incorporations, particularly among
investors from mainland China and Hong Kong. In the US, attorneys
set up Cayman funds for their clients because of the
business-friendly regime and the advisors there whom they trust.
Mauritius, traditionally a destination for Indian clients, has
become a trade route for clients investing into and from Africa.
The use of offshore structures by individuals and businesses from
more developed economies has a real impact on the economies of the
smaller jurisdictions, facilitating capital flow and global trade
while providing jobs for local people.
Yet some feel hampered by what they view as the unfair
application of international rules. Blacklisting and Greylisting
under CRS, FATF requirements, or EU Economic Substance rules
results in bad publicity, making it more difficult for affected
jurisdictions to attract the business volume they need to generate
revenue for making reforms. Though some time is given to phase in
new requirements, many still have difficulty keeping up. Substance
legislation was introduced at record speed across multiple
jurisdictions due to intransigent deadlines established by the EU;
jurisdictions were forced to commit to a new standard, which had
not yet been developed, in order to avoid blacklisting.
It is true that countries don't all play by the same rules.
The US, which requires other nations to comply with FATCA, its own
tax transparency standards, has elected not to follow CRS
guidelines. And the EU's Economic Substance rules are not
applied to its own members.
Laws do not always operate in concert and, as they proliferate,
confusion is bound to increase. This is especially true for
automatic tax information transfers and public registries of
beneficial owners, the latest push towards transparency in
financial affairs.
Sharing — But with Whom?
The centrepiece of CRS is the automatic transfer of
organisations' and individuals' tax information to
participating nations. FATCA has similar requirements for
transferring such information to the US Internal Revenue Service
(IRS).
The exchange of information among governments has unquestionably
led to better compliance, increasing tax revenue worldwide by an
estimated 93 billion Euros, according to the OECD. But it also has
led to unintended consequences such as misuse of data for political
reasons and cyber security issues. Even in the US, the home of
Silicon Valley and cyber innovation, the IRS was breached in 2015.
More recently, a hacker broke into Bulgaria's tax database and
stole the personal information of every working adult in the
country.
The irony is that well-intentioned sharing programs, which were
created to combat fraud, money laundering, and the financing of
terrorist and sanctioned activities, may in fact be inadvertently
contributing to them in some cases. For those adversely affected,
even a single case is too many.
The Countertrend: A Push for Privacy
Concerns about data privacy extend well beyond IFCs. Major
breaches and data misuse by large technology companies, including
Google, Amazon, Facebook, have led to a worldwide backlash against
the uncontrolled sharing of personal information.
In response, new laws have sprung up to protect consumer
privacy. The EU's General Data Privacy Regulation (GDPR), which
went into effect in May 2018, is the most comprehensive. In the US,
California's Consumer Privacy Act adopts many of the GDPR's
provisions, and other states are considering similar legislation.
Argentina, Canada, Switzerland, Uruguay, New Zealand, Guernsey,
Jersey, the Isle of Man, and other nations have all passed data
privacy laws of their own.
Some experts believe the information-sharing provisions of
anti-money laundering laws, which significantly broaden access to
beneficial ownership information, may be in violation of privacy
laws. The EU's own data protection supervisor published an
opinion in 2017 about the European Commission's tax evasion and
anti-money laundering proposals which he described as "a lack
of proportionality", saying it would cause "significant
and unnecessary risks for the individual rights to privacy and data
protection". He specifically objected to measures providing
public access to information about beneficial owners of
companies.
Personal Privacy and Public Registries
For all UK companies, beneficial owners must list their names,
company details, and other information on a public register
published by the government agency Companies House – director
information was already public record. Though public outcry last
year led the agency to remove the requirement for directors to list
their private addresses, the information could easily be derived
from a simple internet search. Indeed, a study by fraud prevention
company Cifas found company directors are twice as likely as the
general public to be targeted with identity theft and fraud.
Companies House has acknowledged the need to protect personal
information on its registry, which contains information on four
million companies and is searched more than five billion times a
year, and says it is exploring "whether some information we
collect should not be available to the public, and only shared with
public authorities such as the police under strict
control".
A good solution, and one that is routinely employed by many
established IFCs such as the BVI and Jersey, is the corporate
service provider model. In these jurisdictions, private information
is not publicly available, but regulated corporate service
providers verify all company information which is available to law
enforcement and tax authorities, as required—a model recently
espoused by the FATF as the "gold standard"—whereas
no verification is undertaken in the UK for the large percentage of
companies that are incorporated directly with Companies House.
Legal Challenges
The conflict between transparency on the one hand and the
individual right to privacy on the other has serious consequences
for IFCs. As with any new legislation, the direction that governing
bodies eventually decide to take will shake out in court cases
where laws are tested. So far, the record is mixed:
In 2017, the EU's Court of Justice ruled that the GDPR's
"right to be forgotten", which gives individuals the
right to have personal data erased, could not be generally applied
to a company register. However, the court also suggested that
limitations on the access of personal data might apply in certain
circumstances.
In France, an American trust beneficiary living in the country
filed suit against a law requiring trusts established by French
residents, having a French beneficiary, or holding assets in France
to disclose the trust details to French tax authorities. In 2016,
France's highest administrative court ruled to provisionally
suspend the register for violating individual privacy.
Numerous challenges to FATCA have been filed and the current
"Accidental American" discussions, disputing the
requirement to transfer personal information to the IRS. Though
none of these cases has been won so far, the EU's executive,
Parliament, and data-protection authorities have all expressed
qualms over the law.
Managing in Turbulent Times
Transparency and data privacy seem mutually exclusive. Will
nations be able to find a middle ground? As the debate over which
agenda governments should follow plays out over the next 10 years,
these decisions will have critical importance for IFCs.
Will public registers of beneficial ownership become the global
standard? If so, all IFCs will need to comply to stay in the game.
Or will the principles of privacy prevail, such that data is only
collected, shared and distributed when required and for specific
purposes (as stipulated within GDPR), to ensure tax compliance and
to assist law enforcement? This is the question which, more than
any other, will dictate how our industry evolves.
IFCs have weathered extraordinary challenges over the past
years. With even more changes expected in the coming decade, we
believe the industry will survive no matter which way the pendulum
eventually swings. The jurisdictions that thrive will be those who
are resilient and continue to develop in order to retain and
attract loyal clients
Originally Published by IFC Review
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