THE BLOG

Reports of the Death of Banking Secrecy Are Greatly Exaggerated

04/11/2014 15:57 GMT | Updated 30/12/2014 10:59 GMT

Leading finance ministers met in Berlin last week to begin the process of adopting a new global standard for the automatic exchange of tax information. In theory, this will allow tax authorities easy access to the details of offshore assets held by their citizens for the first time, supporting efforts to tackle tax evasion. But although the new common reporting standard, developed by the Organisation for Economic Co-operation and Development, is an important milestone on the road towards greater financial transparency, it is still riddled with loopholes and needs serious improvement if it is to be an effective tool in the fight against tax evasion.

Unscrupulous individuals will still be able to hide behind certain opaque legal structures, such as shell companies, foundations and trusts by claiming that their income is derived from business - rather than investments - or by dividing ownership among at least four people. (Only those who own more than 25% will be identified as beneficial owners.) More importantly, there is not yet any provision for an open registry that would enable the public, and the banks, to crosscheck the veracity of alleged beneficial ownership information.

Only financial information is covered under this new multilateral agreement - excluding real estate and hard assets - and a minimum $250,000 threshold removes any reporting requirement for some accounts opened prior to 2016, giving tax dodgers plenty of time to rearrange their affairs. The new regulations do not cover safety deposit boxes and freeports, where valuable items can be stored tax-free. What's more, information can only be used to tackle tax evasion, but not to investigate money-laundering or corruption. Previous efforts to tighten international tax rules have shown that even the smallest loopholes are sure to be exploited by tax dodgers and money-launderers.

By demanding that low-income developing countries sign up to all the same conditions as far more well resourced western nations, along with exhaustive confidentiality requirements, will allow signatories to opt out of the scheme, on the basis that sensitive data need only be exchanged with reciprocal and diligent recipient authorities. In other words, clients of banks based in notorious secrecy jurisdictions will have nothing to worry about, since host governments may refuse to send information to developing countries simply by claiming that they are unable to guarantee data security. Meanwhile, developing countries lose billions of dollars to illicit financial flows, and secrecy jurisdictions (otherwise known as tax havens) often function as the linchpin of a global system through which this money is channeled.

Secrecy jurisdictions can also opt out selectively, on a discretionary case-by-case basis, or systematically reject the new reporting standard. Switzerland has already expressed its intention to sign a limited number of bilateral agreements, but only with countries on which the future of the Swiss finance industry depends. The US is also likely to reject the new multilateral framework, either by not signing or not ratifying, and protecting their own interests via the Foreign Account Tax Compliance Act instead. Even for countries that do ratify, there are no requirements for member states to publicly justify their refusal to exchange information with specific jurisdictions.

This is essentially a voluntary scheme. The common reporting standard will only be fully effective when all jurisdictions participate and when sanctions are imposed for non-compliance. Improved transparency would require detailed country-by-country data to be included in future peer reviews to allow for independent evaluation, and to identify avoidance schemes. There is still time to amend the new standard before it enters into force, by fixing its loopholes and making it inclusive for developing countries. The question, however, depends on political will.