Is Automatic Exchange of Information Good for the Wealth Management Industry & IFCs?

Carlyle Rogers, Stafford Corporate Services, Anguilla.

I would not say that automatic exchange of information is good for the wealth management industry and IFCs by any stretch of the imagination.

My take on this issue is that it appears to be the future and as a result, IFCs and the industry have to find ways to adapt to this new paradigm as well as diversify their product and service offerings.

What it means is that the old ways of doing business, which were often driven solely by taxation issues, opaqueness, and a lack of substance will end while new approaches focused more on what some of us in Anguilla have termed: substance over form, will need to develop. Automatic information exchange is clearly not good for IFCs if the sole purposes of using them were to hide income from tax authorities or for pure secrecy reasons.

I still of course believe that there are valid reasons for confidentiality and financial privacy and to the extent that they have been compromised by automatic exchange of information, especially for HNWIs in countries like Mexico, Venezuela and other parts of Latin America, this is a worrying development and cause of great concern to those of us who advise them.

Financial privacy serves a valid security purpose for persons whose information, if in the wrong hands, could be used by criminals to commit further crimes inclusive of kidnapping, murder, theft and blackmail amongst others. Thus, automatic exchange of information is in effect a dangerous development which could have serious, long-term and unforeseen
consequences which those who support it have not, in my opinion, thought through properly. It is my opinion, that the law of unforeseen consequences will be seen manifested as, if
and when automatic exchange of information is implemented on a wide-scale basis.

Be that as it may, and I will return to this issue later, the new paradigm will allow for IFCs to focus less on pure company incorporation work, or trust domiciliation and move into more valued added areas such as actual trust administration being done from within their geographical confines; fund management and administration taking place on the ground and companies with real mind and management physically located in the same place as their domicile particularly in the area of captive insurance. This will force persons wanting to take advantage of the tax benefits, ease of doing business, risk diversification and financial intermediation role that IFCs play in the global economy to think more strategically about how they structure their affairs and will build a deeper bench of talent in the IFCs who will live and work from them locally.

Automatic exchange of information will hopefully, and I am not too optimistic about this, remove some of the stigma attached to IFCs and integrate them more into the global financial system. Transparency will lead to more importance being placed on issues like reputation capital, making use of taxation arbitrage as opposed to hiding assets overseas from tax authorities, entrepreneurship, intellectual capital, active income as opposed to passive income and the need for actual foreign direct investment as opposed to the use of IFCs for being mere conduits of capital.

The potential opportunities that I see for the wealth management industry and IFCs, despite my deeply held concerns about the lack of financial privacy and confidentiality, in general include chances to move up the value-food chain by being able to offer broader and more sound legal, accounting, structuring and other advice with regards to setting up legal entities that meet the new morality and economic purpose tests. This would include areas such as how a business with mind and management located in the IFC can properly take advantage of the jurisdiction’s low or no income, corporate, capital gains, dividend etc tax regime and how the IFC could be used to build start-up companies that provide services via the internet as part of an incubator programme.

IFCs will likely see an increase in job creation, the moving of highly mobile and talented professionals to their shores, which in term will serve as the nucleus for even greater entrepreneurship and hopefully long term direct inward investment.

The advent of concepts such as Cayman Enterprise City and the drive to lure those who would be inclined to physically relocate to the IFCs, whether or not through government incentive programmes, will only increase. So, while there are opportunities to be had, potentially, from automatic exchange of information on balance it is not something I would support but we must be inclined to take advantage of the new paradigm to the extent possible in order to survive.

Tim Ridley, Attorney-at-law and former Chairman of Cayman Islands Monetary Authority

The international standard on exchange of information has undergone a paradigm shift in a very brief time from bilateral treaties and like arrangements to exchange of information on request to multilateral treaties for spontaneous and automatic exchange. These new arrangements also look down the road to the potential for enforcement of foreign tax judgments.

No-one would espouse the cause of illegal activity, whether it be drug running, money laundering, terrorist financing, fraud, tax evasion or the like. And we have become used to the compliance procedures (and costs) for appropriate ‘know your client’ and due diligence under the FATF driven programme. Equally, under the programme for cross-border mutual legal assistance in criminal matters. More recently we are becoming accustomed to the exchange of tax information on request (and automatically under the narrow European Savings Directive).

The US FATCA programme, the product of the Swiss banks’ “very poor judgment” with their US taxpayer clients, was initially seen as typical US extraterritorial overreach, producing howls from foreign banks and yawns from other governments. But like Saul on the road to Damascus, other nations (particularly in the EU) suddenly saw huge advantage in implementing similar regimes themselves and proceeded accordingly.

We have only just started down this road and the massive implementation issues cannot be overstated, given the significant and often competing legal and tax differences and mismatches between the participating nations. And all of this costs a great deal, both for the public and private sectors (cost benefit analysis does not appear relevant in the minds of the politicians and various government and international agencies involved).

Individuals and corporations using IFCs must expect that their professional and service providers (both onshore and offshore) will require more information about them (and their families), their tax status and tax compliance. Fees will inevitably increase to reflect this. Clients must also expect that information about them and their financial affairs will be supplied (either directly or indirectly, depending on which FATCA type model is used) to appropriate tax departments both on an automatic and on request basis. Those engaged in illegal activity will doubtless find ways of continuing to evade the law, just as they have in the past. Those engaged in legal activity, including tax avoidance (not a crime despite the rhetoric), may decide that the cost and hassles are just not worth it and will stay onshore (where they will still require professional and investment advice). Those with larger bank balances and long term global wealth creation, management and succession plans will certainly stay the course. But they must expect the level of scrutiny, challenge, cost and compliance burdens to increase significantly.

The challenge for IFCs is to be able to deliver the facilities and services these clients require in a cost effective manner that minimises the ‘hassle’ factor.

Francoise Hendy, International Tax Treaty Negotiator and Attorney-at-law

From a practical perspective early allegiance by international financial centres (IFCs) to the Automatic Exchange of Information standard as set out in the OECD Multilateral Convention on Mutual Assistance in Tax Matters makes good sense.

IFCs who recognise that the real issue is not the idea of AEI but its implementation, understand that from a strategic position it makes good sense to demonstrate an interest in a standard which is a natural and an expected progression from the test run that properly characterised the global preoccupation, since the financial melt-down, with exchange of information ‘on request’.

This view finds support in the fact that early subscribers to AEI, who signalled this adoption by signing the Convention, especially in the weeks before and following the 2013 G20 Ministers of Finance meetings, escaped further description as tax havens, at least by the OECD.

Indeed, it is clear that acceptance of AEI provides IFCs with a greater level of immunity from characterisation as an uncooperative tax haven than does the dogged pursuit of TIEAs or even tax treaties codifying bilateral adherence to the current information exchange ‘on request’ benchmark.

IFCs who fail to adopt AEI, even with stellar credentials with respect to the existing global norm will be blacklisted as uncooperative tax havens not only as a part of the OECD Peer
Review Group process but also pursuant to Recommendations arising from the European Union Savings Tax Directive. 

Avoiding unnecessary epithets that not only reduce the
competitive advantage of legitimate and successful IFCs can only be described as good for IFCs, especially those involved in wealth management, an industry perhaps more sensitive to
negative press about jurisdictions where they keep their assets than corporations who are somewhat more hardy.

It is, however, true that signing onto a Convention and ratifying it so that it becomes binding law in the domestic legal context are two entirely different things. State diplomacy expects that signing a treaty is not just a ‘place-marker’ but a genuine
commitment by the signatories to complete the necessary steps to apply the provisions therein. That said however, the fact is that some of the most vocal proponents of AEI have signed and not ratified the Convention.

Although one cannot say with certainty the reasons that have informed the rush to sign up to AEI and the reticence so far to ratify the Convention, one reasonable suggestion is the lack of clarity about how a mutliateralised system of AEI will work.

It is too soon to determine whether the practice of AEI will be good for IFCs because central elements of the standard are yet to be worked out including the regime to ensure compliance. It is, however, clear that it is not a good thing for IFCs to remain outside the standard-setting exercise that will accompany the implementation and monitoring of AEI. Absent membership of the OECD or the G20, the only way for IFCs to be a part of this discussion is through early adoption of the standard through signing onto the Convention.

Denis Kleinfeld, Counsel, Fuerst Ittleman, United States

Let’s agree on a definition of good for purposes of answering this question.

Tax is a political action. As such, concepts such as being worthy, noble, virtuous, upright or moral are not applicable in this context. What is appropriate for this inquiry is the concept of that good means what is in the best interests of the wealth management industry and offshore financial centers.

What is the bench-mark or standard by which we should judge whether something is in the best interests or not? It seems to me that the objective of the wealth management industry and the offshore centers that depend on them for economic survival is to thrive and prosper.

How is this done? They do so by obtaining their clients and customers trust.

In the final analysis, clients and customers use professional services and jurisdictions because they trust that their needs will be a priority over all else.

What is good is to create and maintain the circumstances that create client trust such as the perception of reliability and security.
I think it is unnecessary to provide citations to support the actuality that the major countries of the world, particularly the United States, are not trusted and not viewed as reliable. In
short, they are all in turmoil.

As relates to wealth management, a principal area of hostility to government by its citizens and residents is because of the intrusive and oppressive methods used to enforce tax impositions. Clearly, the taxpayers perceive that are being
terrorised by their own government.

If you accept that this brief background description is accurate, then any further analysis depends on what you perceive are the factual answers to relevant questions.

Among these questions, should be the following:

Do you think that your clients and customers will be enticed to use your services if they see you as the tax enforcement agents of a foreign government?

Would you expect that this would increase your market or limit your market?

What does it take in time, personnel, equipment, and money for international wealth managers and OFCs to comply with ever changing and growing draconian information exchange rules?

Is there any way of quantifying how much money you will need to spend to become compliant and stay compliant?

Is the advice being given to you by your professionals, such as lawyers, accountants, and consultants, reliable?

Have you considered that they have a financial interest in mining this gold vein for all its worth?

Will all this money that you will need to spend now and ongoing, all of which comes off your bottom line, ever earn a rate of return or is it just pure loss?

Other than the dollar for dollar loss of cash flow, will any of the expense serve any benefit at all to in enabling you to provide more and better services to your clients and customers?

By signing onto the information sharing system are you also agreeing to be subject to enforcement to a foreign jurisdiction, like the United States, for purposes of more than just their civil or criminal tax law? Or even new law?

When you obtain all the required information on your clients and customers, is there an actual existing international standard computer system for information sharing?

Will all your client’s and customer’s most intimate information be cyber-secure at every point in the pipeline? What cyber-security certification can possibly be given that can be absolutely relied upon?

When the information is delivered or made available to the foreign revenue authorities will it be limited just for tax purposes? Isn’t that vast amount of information tempting for a government to use for corrupt political purposes or nefarious economic reasons?

What are the Directors and officer personal liability exposure for data privacy breaches or misuse of information? Is there liability insurance available, and in what amount and cost, to specifically cover FATCA liability costs, attorney fees, and related expenses?

What about insurance coverage should there be a class action lawsuit by shareholders for the loss of share value? Does tax compliance with FATCA provide any form of immunity, exemption, or just a defence from liability?

With the linchpin of the tax information reporting system being the implementation of the International Government Agreements, how likely is it that the United States will actually implement internal legislation enabling it to give reciprocity?

Are the IGAs really treaties, and not just administrative agreements, that will need to be consented to by the United States senate?

Is it possible that after the November election in the United States, the congress will repeal FATCA altogether?

Although there have been quite a number of IGAs signed only one country has enacted implementation legislation. In Switzerland, two-thirds of the banks declined to voluntarily enter into FATCA compliance. Why is this?

Whether tax information exchange is good for the wealth management industry and offshore jurisdictions ultimately depends on the perspective from which the question is examined.

Getting the right answer, like all exercises in due diligence, depends on asking the right questions.

Paul Astengo, Senior Finance Centre Executive, Gibraltar Finance

Yes undoubtedly so. Gibraltar is only interested in developing a transparent and collaborative business model. We have already signed 27 TIEAs for example. We signed our IGA with the UK in November 2013 and will shortly sign a similar arrangement with the USA. We continue to actively pursue further TIEA’s. In addition, Gibraltar has TIEA-equivalent arrangements with all EU member states under the provisions of the Directive 2011/16/EU on administrative cooperation in the field of taxation, which came into effect on 1 January 2013.