Confidentiality and International Initiatives

The degree of disclosure varies between different jurisdictions. In some jurisdictions there is a requirement to file details of the directors, shareholders and secretary on a public register, but nominee shareholders and professional directors can be employed to increase confidentiality. In other jurisdictions only minimal public disclosure is required.

Generally, in the jurisdictions that follow English common law there is an implied duty for management companies, bankers and other professionals to keep their clients’ affairs confidential. In some jurisdictions this common law duty may be supplemented by local legislation that imposes criminal penalties on those who breach confidentiality or attempt to get others to do so. For example, the Confidential Relationships (Preservation) Ordinance of the Turks and Caicos Islands imposes a maximum penalty of a fine of USD50,000 and/or a three-year prison sentence on those who reveal confidential information about a TCI company or its business dealings.

In all reputable International Financial Centres (IFCs), details of beneficial ownership must now be made available upon request to “competent authorities”, including foreign tax departments around the world. As a result “anonymity” no longer exists offshore but this will not concern those who engage in legitimate tax planning.

i. Know Your Customer Principles / Due Diligence
The Financial Action Task Force (FATF) is an inter-governmental body that was established in 1989 to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

The FATF developed a series of Recommendations that are recognised as the international standard for anti-money laundering (AML) and combating the financing of terrorism (CFT). First issued in 1990, the FATF Recommendations were revised in 1996, 2001, 2003 and most recently in 2012 to ensure that they remain up to date and relevant, and they are intended to be of universal application.

As a result, all corporate and trust service providers and financial institutions now have a statutory duty to implement “Know Your Customer” (KYC) procedures for all their clients, new and old. For instance, the controls for banks undertaking KYC monitoring for AML and checks relating to CFT would typically include:

  • Collection and analysis of basic customer identity information (CIP);
  • Name matching against lists of known parties (such as “politically exposed persons”);
  • Determination of the customer’s risk in terms of their propensity to commit money laundering or identity theft;
  • Creation of an expectation of a customer’s transactional behaviour;
  • Monitoring of a customer’s transactions against their expected behaviour and recorded profile, as well as that of the customer’s peers.

All countries worldwide are introducing higher standards for due diligence and “KYC” principles, and financial institutions are being ever more diligent and careful about the business they take on and the way that that business is monitored. Customers of any financial institution or financial services provider (including ourselves) must expect to supply proof of identity, proof of residential address and references before they will be taken on as customers, and to explain the source and business purpose for any substantial movement of funds. Compliance with these requirements brings additional costs and inconvenience but is entirely unavoidable and has now become an absolute requirement imposed by local and international regulations and/or laws.

ii. Exchange of Information and Harmful Taxation
In May 1996, the Organisation for Economic Cooperation & Development (OECD) called for its members to “develop measures to counter the distorting effect of harmful tax competition”. Two years later it listed 41 jurisdictions as “tax havens” and called on them to make commitments to end harmful tax practices. The identifying criteria for blacklisting were: low or no income taxes; ring fencing between resident and non-resident tax regimes; lack of transparency; and failure to exchange information.

In 2001, following criticism from non-OECD countries and a shift in US government policy, the OECD modified its campaign by removing the criterion relating to low or no income taxes. Instead jurisdictions were asked to increase transparency and to facilitate exchange of information.

iii. Exchange of Information on Request
In 2001, the OECD formed the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) to provide a multilateral framework within which work in the area of transparency and exchange of information could be carried out by both OECD and non-OECD member countries with the aim of developing international standards and establishing a global level playing field.

An internationally agreed standard, developed by the OECD’s Global Forum and endorsed by G20 Finance Ministers in 2004, required:

  • Exchange of information on request where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of the treaty partner.
  • No restrictions on exchange caused by bank secrecy or domestic tax interest requirements.
  • Availability of reliable information and powers to obtain it.
  • Respect for taxpayers’ rights.
  • Strict confidentiality of information exchanged.

New provisions for the exchange of information between national tax authorities were agreed for the OECD’s Model Tax Convention on Income and on Capital. Article 26 was changed to clarify that Contracting States should obtain and exchange information and to prevent bank secrecy from being used as a basis for a refusal. The Global Forum also developed a Model Agreement on Information Exchange on Tax Matters that countries could use to guide bilateral negotiations for Tax Information Exchange Agreements (TIEAs).

The first bilateral Tax Information Exchange Agreement (TIEA) was signed between the US and Antigua and Barbuda on 6 December 2000. The US subsequently signed a further eight TIEAs over the next two years with major IFCs – the Cayman Islands, the Bahamas, British Virgin Islands, Netherlands Antilles, Guernsey, Isle of Man, Jersey and Aruba.

These agreements required the contracting states to exchange information, upon request, that was relevant to the assessment and collection of tax and enforcement of tax claims or the investigation or prosecution of tax crimes. Only a further 18 TIEAs were signed worldwide until the global financial crisis in September 2008.

In 2009 the G20 Leaders called on the Global Forum to ensure rapid implementation of the international standard of transparency and exchange of information. The Global Forum reported that 78 jurisdictions had committed to its internationally agreed tax standard. Since then, the number of jurisdictions that have committed to implement the OECD standard and have joined the Global Forum has grown to 119 and more than 1,100 new exchange of information relationships to the standard – either through bilateral and multilateral TIEAs or through double tax treaties incorporating Article 26 – have been put in place.

The Global Forum has also completed 113 peer reviews covering 98 jurisdictions and issued over 650 recommendations for improvement, more than 400 of which are being acted upon. The reviews of jurisdictions laws’ (Phase 1 reviews) have been completed for Global Forum member jurisdictions and the focus has now shifted to the Phase 2 reviews of practical implementation. The reviews of practice will lead to the Global Forum issuing ratings both for a jurisdiction’s compliance with each element of its terms of reference as well as an overall rating. The first ratings (for as many as50 jurisdictions) were scheduled to be finalised by the Global Forum in November 2013.