Financial Transparency Coalition

There is much speculation about the nature of the deal the US has come to with Switzerland over the UBS case and the US demand for 52,000 names concerning accounts they think might have resulted in US tax abuse.

No one knows what the agreement is, but there’s lots of noise. In that there’s considerable spin going on.

I can say one thing for sure: the US won’t get what it asked for and Switzerland will claim it’s banking secrecy will survive.

The latter claim seems unlikely to be true. First, it’s thought that maybe 5,000 names will be given. That shatters secrecy. If 1 in 10 names are disclosed the rest will fear that the dam has burst: that’s the end of trust in bank secrecy.

Second, it’s widely recognised UBS were not the only people doing this. You can be sure that the remaining Swiss banks will be subject to much greater scrutiny now – at least as far as their Swiss operations go. Most are moving to Singapore anyway.

Third, although it seems possible that income details may not be provided on the accounts in question – just names, my answer is so what? As I’ve argued, the key issue is the provision of a ‘smoking gun’ to the country in which the tax evader lives so that they might begin an enquiry in which the state in which they have relocated their assets acts as information supplier on demand.

It looks to me as if this is the direction of travel in the negotiations between the US and Switzerland: names will be given and it will then be up to the US to ask for the details having begun investigations on their own account back home into the affairs of the people who have been named.

There are some who won’t like this: who want full information exchange on all income, gains, profits, distributions and the rest. I’d like that too: but I’m also pragmatic; just defining these terms will take a decade. I can’t wait that long for smoking guns to be delivered. So whilst this should remain a goal (and I stress: I think that is appropriate) an interim step is needed. As I argue in my paper on this:

The key concern when tackling capital flight is the illegal, disguised nature of the illicit fund flows. Ignoring transfer mispricing, the key mechanisms used for this illegal purpose are offshore financial structures such as trusts, companies and foundations.

There is at present no automatic information exchange with regard to such structures within the EU, let alone elsewhere.

The automatic information exchange arrangements which currently exist relate only to interest income paid to accounts held in individual’s names. The European Union Savings Tax Directive (EUSTD) is the key example of this arrangement.

Suggestion has been made that the EUSTD should be extended to developing countries. If and when the EUSTD is extended, as the Commission plans, to trusts and companies in offshore locations this might provide some benefits if extended to developing countries but in its current form the EUSTD is unlikely to do so: it is quite unlikely that significant deposits resulting from illicit financial flows are held in individuals own names. It is relatively easy, and cheap, to set up trusts and corporate structures that can hide these flows from view.

This does, however, suggest exactly what information is required to trigger an effective information exchange request by a developing country. Those countries do not need to know the precise details of interest, profits, gains or other income accruing to offshore structures created by, owned by, or which benefit people resident within their jurisdictions to enable them to make an effective enquiry under a tax information exchange agreement. They simply need to know:

1. That such a structure exists (a bank account qualifying by itself as a structure for this purpose);

2. What each component (trust, company, or foundation) is called;

3. Who manages it;

4. Where it banks;

5. Who in their jurisdiction benefits from it.

If this data were available it is likely that almost every country in the world could and would substantially increase the number of tax information exchange requests that they might make using the proposed network of Tax Information Exchange Agreements.

What is therefore required is that this information, which the regulatory authorities of every single jurisdiction subject to IMF /FATF regulation must have available to it, be automatically exchanged with the jurisdictions in which the beneficiaries of those structures are located; that location to be identified by both the place of main residence of a beneficiary and by the country which issues them with their passport (with those places issue passports of dubious repute to be specifically blacklisted for anti-money-laundering identification purposes).

If this data were to be automatically exchanged then no further information on income need be exchanged, at least in the early stages of any information exchange process. That is because sufficient data to firstly disincentive use of such arrangements and secondly to allow information exchange requests to be made would exist. Pragmatically, that is most of what is desired of the automatic information exchange process. This does, however, have the benefit of massively reducing the risks inherent in automatic data exchange by removing entirely from that process, at least in its initial stages, any reference to specific income details.

With this data Tax Information Exchange Agreements become meaningful: the ‘smoking gun’ required to make them useful would exist.

This is not an answer for the purists. Nor will the Swiss deal suit them. But this is a way of making real progress in the relatively short term that paves the way to more comprehensive arrangements in the long term, if they are needed. And like the Swiss deal, the power of such an arrangement will be that it will dissuade considerable numbers from even contemplating abuse because of the increased fear of being caught.

The reality is we’ll never stop tax abuse. I know that. Stopping a lot of it is the goal. That’s a pragmatic goal. This is a pragmatic solution. The Swiss deal, imperfect as many will consider it to be, might just be a step in that direction.

If it is then Swiss bank secrecy won’t survive as a matter of fact, whatever their law says. Which will definitely be a step in the right direction.