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.
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.
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
Simon Filmer Simon is Global Lead, Company Formation at Vistra. He has more than 20 years of senior management experience in the fiduciary services industry and has considerable experience in the areas of corporate business, trusts and investment business. Simon is regularly consulted by regulators and governments on financial services matters, and has served on numerous industry committees, especially in the BVI. He is a frequent speaker at industry events, is recognized as a thought leader, and has been a driving force in the influential Vistra 2020 series, Vistra's flagship research on the corporate services industry. Simon has a Bachelor of Arts Honours degree from the University of Manchester in the UK, is a Fellow of the Institute of Chartered Secretaries and Administrators, and a Member of the Society of Trust & Estate Practitioners.