Unfortunately, the mere mention of the word ‘offshore’ and even worse, followed by ‘secrecy’ is synonymous with criminal shady behaviour, though few can identify what exactly the crime is.
The Panama Papers scandal was evidence of that. Therein lies the rub, investing or banking in an offshore jurisdiction is not, in of itself, an unlawful activity, just as confidentiality in financial affairs, as a legal principle, is perfectly legitimate and lawful.
The inherent legality of offshore investment is finally hitting home so much so that now the monologue is being adjusted, goal posts changing to say that it might not be unlawful, but it is unethical. Actually, we should be thankful that finally, the cat is out of the bag, acknowledging frontally that this is about tax revenue and monies lost. This is some progress, since there is now little talk of money laundering – affirming what I have said for 20 years. As I have constantly argued, this so called secrecy onslaught was never about dark secrets such as money laundering (what we were being accused of pre 2001). It was always about tax revenue. Today, what has been laid bare and what the US cases have been saying for years, that ‘taxes are the lifeblood’ of the US and that they have a ‘greater interest’ than offshore financial centres (OFCs) or anyone else to apply their own laws in any conflict, is being demonstrated for all to see.
Yet, offshore investment continues to be seen as somehow wrong and the fact that we don’t know much about it, fuels this perception. Confidentially remains contentious and seems always to be a red flag, but it is important to reiterate that confidentiality in financial affairs has always been and will remain a valued and legitimate principle.
In truth, the offshore financial sector today enjoys far less confidentiality protection than the onshore sector. It has been more scrutinised and curtailed than the onshore sector, resulting in a severe erosion of confidentiality. There has been a literal avalanche of regulation, radical legislative change, extraterritorial application of jurisdiction by onshore states, US, judicial activism and even treaty making, all targeting confidentiality in offshore finance, precisely because it is understood that creating highways of information for anything that even resembles foreign investment and commerce, is the key to revenue generation in onshore jurisdictions – that revenue being realised through expanded tax revenue channels. The latest examples are FATCA and TIEAs but these are just two instruments in a very long line of disclosure initiatives/ attacks from onshore.
These new mechanisms supplement the inbuilt disclosure avenues available for suspected serious crime (money laundering and fraud), which were always present and well-utilised in OFC confidentiality laws. See, for example, the several cases where the view was that confidentiality should not serve as “a screen for facilitating fraud”.
How much ‘haven’ status can any sector endure in an environment with FATCA and TIEAs, coupled with the several onshore disclosure obligations onshore, including to report income as beneficiaries of non-resident trusts even before assets have been distributed, expatriate taxes for wealth citizens renouncing citizenship and even the very doctrine of world-wide taxation of citizens no matter the source of the investment?
Indeed, many of these onshore and treaty initiatives may be seen as discriminatory – at the very least we have created a regime which thrives on exceptionalism, with legal rules and duties, including confidentiality, which are perfectly legal and unremarkable when used onshore, being deemed unlawful and scandalous when offshore, or similarly, eroding established legal principles, such as the confidential nature of a trust, dual criminality, the legality of tax avoidance and tax planning, jurisdiction to tax, ownership and control of trusts, and so on. simply because they can be used to create some disadvantage to the coffers of the onshore jurisdiction.
Nonetheless, it is precisely because confidentiality and even its more entrenched cousin, privacy rights, are inherently legitimate, that they cannot be absolutely annihilated, despite the severe erosions these established concepts have suffered. Consequently, we continue to witness victories for confidentiality and privacy in financial affairs in other commercial arenas, underscoring the value of the principle. On the other hand, as we manoeuvre through the very restrictive environment demanding disclosure, it is possible to identify cracks of light protecting information which, quite appropriately, should not be disclosed.
For example, an important victory for financial privacy was scored when Apple won a battle before the self-same onshore courts that they could not be compelled to surrender information on their iPhone, even in the face of attempts to identify terrorists. A similar result was achieved in the Microsoft Ireland matter. We have also seen some very recent cases such as Re Tiffany, where no less than the US has been championing the cause of confidentiality in commercial affairs and the principle of comity, in a line of patent cases with China.
It is true, however, that TIEAs, which we have all been forced to sign, override well-established and respected principles of law in a unilateral, unfair attempt to favour onshore nations’ revenue generation objectives while penalising offshore jurisdictions. Moreover, these principles remain in force as valid legal principles in every other sphere, which underscores the unfair and unethical nature of these instruments, not to mention seriously prejudicing the fundamental concept of certainty in law-making.
These treaty instruments permit countries to seek information on financial affairs in order to facilitate tax prosecutions – once there is reasonable foreseeability threshold is met. The fact that any international legal assistance is possible at all is only because these treaty parties have ‘agreed’ to sign away the long-established principle on the rule against enforcement of foreign tax laws – that no country enforces the tax laws of another, either directly or indirectly. While two countries are involved, the impact is adversely felt only by offshore countries that have more to lose since international assistance here is expected to be one sided. Offshore jurisdictions have therefore sold away their birth right.
Before the emergence of TIEAs, onshore countries like the US and Germany were unable to penetrate these well-accepted legal principles without extreme criticism even from other onshore countries such as the UK.
As such, over the many years, when the US IRS and so on sought aggressively to ‘fish’ for information on US citizens and residents who had investments overseas, they would encounter this hurdle that information could not be given because of this rule on non-enforcement. Offshore countries happily and willingly gave information where serious crime, such as money–laundering, fraud, and so on, was involved when onshore countries sought information through a considerable arsenal for assistance, such as letters of request (letters rogatory), or even MLATs, but drew the line, appropriately, at information merely for tax collection based on this rule. In fact, most MLATs specifically excluded requests for tax information since this has always been accepted as appropriate practice between states. Further, letters of request are discretionary mechanisms.
Further, with the dual criminality principle, requiring that both countries have the identical crime, a longstanding obstacle to legal assistance has been abolished. This is yet another example of exceptionalism and inconsistency in initiatives against offshore jurisdictions, since the dual criminality doctrine is an indispensable aspect of international legal assistance and international law (seen in extradition etc.) and continues to exist everywhere else including in onshore countries and for all other subject matters except offshore issues.
Yet TIEAs are not immune to privacy concerns. It is instructive that exceptions to disclosure include the rule on fishing, an entrenched, internationally accepted principle of evidence and also the rule on legal privilege. If there is no specific prima facie evidence of wrongdoing/illegal activity identified, a person’s confidentiality must be protected and information cannot be surrendered.
Judicial Review of TIEAs
Notably too, requests under TIEAs, since they involve decisions by public authorities, are subject to judicial review and, already, we are beginning to see such challenges, including on how to interpret treaty concepts. Thus, TEIAS are not impenetrable, precisely because valid legal principles are enduring, not least because they still exist outside of these narrow offshore prisms. For example, beneficial ownership as opposed to legal ownership has been a key concern of onshore aggressors in these new disclosure initiatives. They seek information on the persons who truly benefit from offshore structures, although such complex arrangements are often mirrored onshore and in many instances, not only do we not know who are really the beneficial owners of certain commercial entities, but it is legal for us not to know.
Yet, treaties, like legislation, must be interpreted. In the interpretation exercise, we must of necessity turn to accepted understandings of legal principles. As such, a beneficial owner, about whom information is owed under TIEAS, is a particular animal in law. IT has a specific legal meaning which cannot be manufactured solely for the convenience of those wishing to dismantle onshore structures. Consequently, we have already seen challenges to these TIEA disclosure powers by local courts, in this case, in Switzerland, challenging them. In a line of cases from Switzerland, for example, the Swiss courts overturned the decisions of the Swiss authorities under the TIEA with the US to give information on the beneficial owners, deeming those concerned not to be the beneficial owners of certain offshore trusts in the true interpretation of the term.
Right to Privacy and Related Rights
Confidentiality has deeper connotations when we consider constitutional and rights issues, especially the right to privacy and to some extent the privilege against self-incrimination. Privacy rights were previously considered weak and certainly not absolute in US or Caribbean constitutions and in many parts of the common law world. Unlike in Europe, there is no explicit right to financial privacy and it must be extrapolated from elastic interpretations of the general right to privacy, itself narrowly constructed within search and seizure provisions, focussing on privacy of the person and the home.
However, I argued over 20 years ago that financial privacy was a feature of offshore law to be monitored and indeed, privacy and related rights have emerged as fast growing area subjects in business generally. In the earlier cases when balanced, as it must be, against law enforcement interests, it succumbed easily, as in Royal Bank of Canada v Apollo Development (Bahamas) Ltd.
Yet, increasingly, its value is being heralded by the courts. For example, the Canadian courts, in cases like Hunter, gave us successes for financial privacy, even in the face of law enforcement interests, as have the EU courts, when balanced against the interest of the state in collecting taxes. At the very least, the state must act proportionately when subverting privacy for law enforcement or tax revenue gains. More recent cases perhaps signal a new mood of the courts, confronted with increasing invasions of citizen’s rights, even in the face of terrorism and law enforcement fears. For example, they have struck down compulsory information and listing for terrorist purposes on the grounds of proportionality and other privacy freedoms. Similarly, the recent rejection of the UK’s attempts to introduce routine surveillance measures without adequate concern for privacy rights is evidence of this.
The aforementioned Apple iPhone judgment from the US is instructive in its caution about ‘unwarranted intrusion’ into the affairs of its citizens, even in the face of terrorist attacks. This case is even more remarkable given the previous dismissive attitude of the US courts in relation to privacy rights in the commercial sphere, where the view was that one had no reasonable expectation of privacy if money was placed in a bank, deemed as a public space.
While not all these cases concern offshore financial centres, they might herald an important philosophical shift to privacy to counter Big Brother, which might prove significant for offshore privacy, if the double standards can be avoided.
Recent cases demonstrate that courts will also insist on due process requirements in relation to requests for information. An affected person must be given notice of a request for information under a TIEA and adequate provision for a fair hearing.
Note too the hypocrisy of the US approach in that the US provides de facto bank secrecy to foreign persons making passive investments in the US, especially through the US Qualified Intermediary Program which limits the ability of the US government to exchange tax information with foreign governments
It is a myth that offshore jurisdictions are ‘secrecy havens’ today or that they are inherently unlawful or unethical. Rather, they are subjected to far more disclosure obligations than typical onshore jurisdictions or business arrangements, despite the fact that much more serious financial crime happens onshore, for which onshore countries are not blacklisted. Yet, precisely because confidentiality is a valued and legitimate principle in financial affairs and because it upholds a legal sector, which engages in lawful activity not dissimilar to what obtains onshore, disclosure attempts can be challenged successfully and enable rights to privacy to survive, to sustain valid financial arrangements – and rightly so.
Professor Rose-Marie Belle Antoine
Dean of Law