Financial Transparency Coalition

This blog post is a summary of some of the findings and discussion of a new report from Tax Justice Network, a Coordinating Committee member of the FTC. To read the full report, click here.

How to improve the Automatic Exchange of Information

Automatic exchange of information (AEOI) is one of the hottest topics in the fight against tax evasion. The idea is that tax authorities will automatically exchange information about tax payers with financial assets in their jurisdictions. So, if someone from Spain has a bank account in the Cayman Islands, the Cayman Island authorities will, if many conditions are met, automatically inform the Spanish tax authorities. 

We have generally welcomed this development, but we have also warned about many loopholes, especially those which prevent access to information by developing countries.

For this reason, TJN sent a survey to more than 100 jurisdictions asking their views about how to improve the new AEOI system (the report is available here). We received answers by 30 countries, including low income and high income economies, all of which gave their perspective on the idea of sanctions against recalcitrant financial centres, how they will treat the U.S. which refuses to join the system, their awareness of statistics to provide at least basic data to developing countries that were left behind and will not receive any information, or their interest in pilot projects to assist those developing countries, among many other questions.

One of the issues that attracted a great deal of support was a necessary and easy-to-do fix, that has not seen the light yet.

Exchanging, not sharing

Tax authorities fiercely guard their access to information, and under the proposed system, information will only be available for tax purposes. But should that information be available to other law enforcement agencies?

Tax evasion often goes hand in hand with other forms of financial crime. If someone is hiding the proceeds of corruption or criminal activity, they probably also engaged in tax evasion. Al Capone was after all sent to jail for tax evasion and not for his many other crimes, both violent and financial.

However, under the proposed rules for automatic information exchange, if a tax authority receives information from a foreign tax authority which is evidence of other financial crimes, then it cannot pass it on to other prosecuting authorities.

This has been an issue in the past. For example, when Herve Falciani’s list of account holders in HSBC Switzerland  ended up in the hands of the French authorities, the French Minister of Finance sought to share that information with other countries to help them to pursue tax evasion in their country.

In the UK, after the government started to receive criticism for pursuing just one criminal prosecution from the leaked data, the tax authority claimed that one reason for this was that under the existing information exchange treaty with France, it had been unable to share the information for any other purpose than to pursue tax crimes. At the time the UK stated that all other countries that had received the list from the French had taken the information on the same terms. There were few tax crimes pursued in the UK, because the UK government granted an effective amnesty on tax to people and companies appearing on the list.

In our survey, which is being released today, we set out to ask officials in tax authorities whether they would be comfortable sharing tax related data with other law enforcement agencies. Of the people that responded, an enormous 83% said they would be in favour of sharing information to help tackle offences like money laundering and corruption.

Although some may raise concerns about privacy, in realty this should not be an issue. Tax authorities already regularly share information with colleagues in other law enforcement agencies and beyond. In the UK the government has even proposed that the tax collectors share individual tax information with local housing authorities so that they know how much individuals in rent controlled homes are earning. The idea is that the government will allow these authorities to increase the rents on higher earners.

The issue therefore, is not with the principle of information sharing between domestic law enforcement authorities, but with the specific rules around sharing information which originates from abroad.

Our data suggests that even the new international policy framework is significantly behind the times in terms of preferences of tax administrations. Government and international institutions now need to be much more ambitious in the scope for automatic information exchange.