I INTRODUCTION

i OECD developments

The OECD has become the central body charged with delivering the international agenda for greater transparency regarding asset holdings. There have traditionally been two main strands to its work in this area, both aimed at establishing internationally consistent standards. One strand focuses on information exchange for tax purposes and is led by the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum). The other strand is focused upon international standards for anti-money laundering (AML) regulations. The work here is led by the Financial Action Task Force (FATF). While the Global Forum and the FATF remain distinct bodies within the OECD, they nevertheless work closely with each other. Recently, however, a third major work stream, known as Base Erosion and Profit Shifting (BEPS), led by the OECD Committee on Fiscal Affairs, has come to the fore. This work stream is focused on tackling corporate tax planning strategies that artificially shift profits to low or no-tax locations where there is little or no economic activity. All three initiatives have now gained considerable momentum thanks to the strong support of most of the world’s major economies.

ii The FATF

The FATF published revised recommendations for minimum national AML standards (generally referred to as the FATF’s 40 Recommendations) in February 2012.2 The 40 Recommendations were the result of long and at times heated negotiations and their publication has prompted a period of very intensive implementation work in many of the major economies. As a result, a variety of jurisdictions are now working on significant new legislative proposals in the AML area.

It was clear at an early stage that many of the most fundamental changes flowing from the FATF’s Recommendations would result from new requirements intended to improve the transparency of beneficial ownership. While the proposed new regime for trusts (outlined in FATF Recommendation 25) contains only relatively limited changes in this area, the changes for companies (outlined in Recommendation 24) are much more fundamental.

The FATF now requires that countries should ensure that companies either obtain and make available information on their beneficial ownership or ensure that there are alternative mechanisms, such as registries, in place so that beneficial ownership of a company can be determined in a timely manner by competent authorities. Countries are also required to ensure that one or more natural persons, or DNFBPs,3 are authorised by the company and accountable to competent authorities for the provision of beneficial ownership information to competent authorities and for giving assistance to competent authorities.

The UK’s response to this new global standard has been to enact reform of procedures for the collection and holding of information on People with Significant Control (PSCs) via the Small Business, Enterprise and Employment Act.4 It is notable that this legislation is not just aimed at meeting the requirements of FATF Recommendation 24, but goes significantly further. Not only does it establish a statutory register of beneficial owners of companies (in the form of PSCs) but it also gives a right of public access to the beneficial ownership information rather than confining access to competent authorities. Thus the Bill requires companies to hold information on their own beneficial ownership and respond to any reasonable public request for information from the register as well as file beneficial ownership information with the national registrar of companies.

The UK focus on ensuring public access to corporate beneficial ownership information raises the issue of what information should be shown on the corporate register where the beneficial owner of a corporate entity is a trust. The initial suggestion was that the corporate register should show the name of the trust, the trustees and the beneficial owners of the trust. Ultimately, however, the argument that in practice many trusts are established to protect vulnerable beneficiaries and that publication of the names of such beneficiaries would potentially leave them at risk was accepted. The Bill therefore calls for the corporate register, where the beneficial owner is a trust, to show simply the names of the trustees and anyone who has the ‘right to exercise, or actually exercises, significant influence or control over the activities’ of the trust or company.5 The Bill applies to all UK-incorporated companies, including limited liability partnerships, as well as to individuals who hold a UK company through an overseas holding company, and they will be obliged to register unless they hold a minority interest – in which case they will be exempted.

The UK approach to implementing the FATF Recommendations is particularly notable since the UK has indicated that it would like the UK, the Crown Dependencies and Overseas Territories (CDOTs) to ‘move forward together (with the UK) in raising standards of transparency globally’ and that ‘making company beneficial ownership information open to the public is by far the best approach’.6 Most CDOTs have now created or are in the process of creating registers of beneficial ownership, although there may be differences with regards to whether they are centralised or publicly available. For trusts, perhaps the most notable is the implementation of the French trust register in June 2016, which uses information originally provided for tax purposes and publicly discloses the name of the trust, the trustees, the settlor and the beneficiaries.

Publicly accessible registers of beneficial ownership are also a key feature of the fourth EU AML Directive, which entered into force and appeared in the Official Journal in June 2015.7 The Directive, which must be implemented by Member States by 26 June 2017, goes well beyond FATF requirements. For corporates and other legal entities Article 30 requires that Member States ensure that beneficial ownership information is held in a central register and that the information held on the register is available to competent authorities, obliged entities and ‘any person or organisation that can demonstrate a legitimate interest’. Exactly how ‘demonstrate a legitimate interest’ will be interpreted at Member State level remains to be seen, but the general expectation is that this will allow public access, in line with the UK’s approach.

Article 31 takes a different approach for trusts. Trustees must hold beneficial ownership information and this will be held in a central registry ‘when the trust generates tax consequences’. Competent authorities will have full access to the central registry and a Member State may opt to allow public access to the register.

In the wake of French terrorist attacks and the Panama Papers leak, the EU decided to revise the Fourth AML Directive even before it had been implemented.8 The proposed revisions for Article 31 state that beneficial ownership information on companies and business-related trusts will be publicly available and all other trusts will be included in the national registers and available to parties that can show a legitimate interest. Beneficiaries of private trusts need only be disclosed to parties ‘holding a legitimate interest’, which could include non-governmental organisation groups and journalists.

The Directive additionally requires the Commission to identify third-country jurisdictions which have strategic deficiencies in their national AML regimes (‘high-risk third countries’). It gives the Commission a wide degree of discretion on how to define such high-risk countries and it has been suggested that this will be used to pressure near neighbours of the EU and significant financial centres to adopt similar AML procedures to those laid out in the Directive.

The UK’s decision to leave the EU creates uncertainty as to the future force of EU Directives in the UK. It is likely that it will be excluded from negotiations regarding the EU regulation but it may nevertheless be pressured into implementing EU legislation to preserve access to EU markets. It appears that Europe has moved decisively towards publicly accessible registers to meet its obligations under the revised FATF Recommendation.

The US seems to be taking a different approach. It is now a FATF requirement for governments to conduct an AML national risk assessment and the US has now published its first such assessment since 2005.9 The assessment acknowledges that ‘the United States has a large, complex and open financial system – making it a destination for legitimate trade and investment but also a target for illicit activity and actors’. Rather than registers, however, the US approach rests on the twin pillars of extensive regulation of financial institutions alongside well-equipped enforcement and supervisory bodies. The assessment concludes that in the case of the US, ‘law enforcement generally has access to the information it needs to investigate money laundering cases in the United States, but cooperation and transparency are not always present in other countries’. The Financial Sector Assessment Program (FSAP) for the US published a report in July 2015 stating that the US will undergo a complete mutual evaluation by the FATF in 2015, the results of which will be made public in 2016.10 At the time of writing these results have not been published.

There is, nevertheless, a proposal from the White House to empower the Internal Revenue Service to collect information on the beneficial owner of any legal entity organised in any US state.11 The measure would also allow law enforcement to access beneficial ownership information collected by the IRS. This proposal looks rather like the EU Fourth Directive’s approach to collecting beneficial ownership information for trusts, although it is fair to say that so far there is little apparent political momentum behind it and many will doubt that it will survive a new incumbent in the White House.

While governments are still struggling to find a consensus solution to the implementation of the revised FATF Recommendations, the FATF itself is already starting to focus on some unintended consequences of its guidelines. The one wholly new recommendation from FATF in its 2012 revisions was Recommendation 1 related to the risk-based approach. This required both countries and financial institutions to ‘identify, assess and take effective action to mitigate their money laundering and terrorist financing risks’. In the case of financial institutions, it has also become clear that any breach here can attract some very significant penalties. In many respects the emphasis on requiring the financial sector to make risk assessments, and then suffering the consequences if it gets it wrong, mimics the US domestic approach to AML, which is far less focused on registers than the emerging European approach, but the net result is, perhaps predictably, that the banks have been undertaking a major programme of de-risking their businesses from an AML perspective.

The most widely publicised concerns raised by this de-risking process relate to fears of a major reduction in the access of many developing countries to the global financial system. Thus de-risking was identified as a ‘priority area’ for further work by the incoming Australian FATF Presidency of FATF in summer 2014.12 Those looking for an early major re-think on the part of FATF on the risk-based approach may be disappointed. Thus the FATF position adopted at its Brisbane Plenary in June 2015 is that many of the main drivers behind some of the less welcome consequences of de-risking actually reflect issues well away from AML regulation and flow primarily from more onerous banking regulation.13

At the request of the G20 and the Financial Stability Board (FSB), the World Bank Group has led fact-finding work on de-risking, which involves research of the withdrawal of correspondent banking relationships from clients or categories of clients to avoid risk rather than manage it. The International Monetary Fund has also issued a report warning of the dangers of banks’ de-risking strategies in June 2016.14 As yet, however, there has been little recognition that the de-risking strategy of the banking sector is affecting users of financial services much more widely than just the developing countries or that it is effectively forcing users of financial services to switch from first-rank, and arguably better regulated, financial institutions to second-tier institutions, creating the possibility that, in reality, greater risk is being introduced into the financial system.

II OECD GLOBAL FORUM ON TRANSPARENCY & EXCHANGE OF INFORMATION FOR TAX PURPOSES

The Global Forum is the major international body for ensuring the implementation of the internationally agreed standards of transparency and exchange of information in the tax area. The Global Forum was originally established in the early 2000s but was significantly restructured in 2009 and now has a much wider membership comprised of 126 jurisdictions (plus the European Union).

The restructuring of the Global Forum resulted in a major expansion of the Global Forum’s work programme, with the main objective being the establishment of a comprehensive network of bilateral tax information exchange agreements (TIEAs). TIEAs are based on the principle of tax information exchange on request, reinforced by a peer review process to examine both the availability of the necessary information for tax information exchange and the effectiveness of the processing of requests for information exchange.

More than 1,600 TIEAs have now been put in place and over 100 jurisdictions have been subject to peer review. Moreover, the past couple of years have seen a strong emphasis, at the request of the G20, on bringing developing countries into the network to give them an opportunity to obtain tax information on request. While the TIEA framework developed by the Global Forum is based on information exchange on request, from the start it was acknowledged that ultimately the goal was to move to automatic information exchange. Equally, however, it was clear that automatic information exchange on such a broad front would impose significant resource strains on many tax authorities, particularly among the less developed economies. Automatic tax information exchange on a global basis was therefore usually seen as being a very long-term objective.

The arrival from the US of the Foreign Account Tax Compliance Act (FATCA), based on automatic information exchange, nevertheless changed the basis of the international debate on tax information exchange. In spring 2013, the G20 Finance Ministers and Central Bank Governors endorsed automatic exchange, as opposed to information exchange on request, as the new global standard for tax information exchange and requested the OECD, working with the G20, to develop a new standard based upon automatic exchange of information.

The OECD’s proposals, generally known as the Common Reporting Standard (CRS), are based heavily on the Model 1 Intergovernmental Agreements (IGAs) many jurisdictions have concluded with the US. The CRS model was first published in outline in February 2014, with further details being published in July 2014.15 The OECD’s approach has now been endorsed by all 34 members of the OECD and in total over 101 jurisdictions have committed to adoption of the new standard within a clear timetable.16 This includes the whole of the EU, which will implement the CRS via the Directive on Administrative Cooperation (DAC), the so-called BRICs (Brazil, Russia, India and China) and most of the major global economies (such as Japan, Australia, Canada and Switzerland). The only major outlier is therefore the US, which remains committed to FATCA and declines to implement the CRS on the basis that FATCA is adequate for its needs.

The legal basis for the CRS highlighted by the OECD is the Multilateral Convention on Mutual Administrative Assistance in Tax Matters,17 which currently has over 90 signatories, including all members of the G20. The Convention requires separate agreements between the competent authorities of the various parties, with automatic exchange of information then taking place on a bilateral basis between the relevant parties. This is seen as providing an important protection since jurisdictions will be able to decline to enter into agreements with any party where there are significant concerns about ensuring the confidentiality of data exchange or the uses that will be made of information exchanged for tax purposes. There is, however, a proposal currently being worked upon to provide a standardised assessment of each participating jurisdiction’s ability to ensure appropriate use of any tax data received as part of a peer review type process.

Certainly in this context the OECD itself is keen to stress the safeguards inherent in both the Convention and the CRS and make it clear that where the required standards ‘are not met (whether in law or in practice), countries will not exchange information’.18 It is notable, however, these protections, plus the presumption of reciprocity, are coming under criticism from those campaigning on behalf of developing countries on the grounds that they may in reality mean that many poorer developing countries are denied access to the CRS. The OECD acknowledges the ‘developing countries may face particular capacity issues as regards automatic exchange of information’19 and notes that the Global Forum has been asked to work with the OECD Task Force on Tax and Development and others to assist with capacity building in developing countries.

Alongside capacity building in developing countries, the Global Forum will now be responsible for monitoring and reviewing the implementation of the CRS. There are global concerns that the information being exchanged under CRS might be leaked; therefore, the monitoring of the robustness of each jurisdiction’s system will be essential. The precise methodology by which implementation will be monitored has yet to be decided, but it seems likely that the peer review process established for the previous global standard, tax information exchange on request (via TIEAs) will now be extended to the new global standard, automatic exchange of tax information.

The arrival of the CRS as the new global standard for exchange of tax information has implications for some of the other tax information exchange initiatives that have been developed. It is envisaged, for example, that the arrival of CRS reporting in 2017 will effectively replace the FATCA-style Intergovernmental Agreements the UK has with the Crown Dependencies and Overseas Territories.

It is anticipated, however, that the CRS will exist alongside the current OECD TIEA process, with the limited information exchange automatically via the CRS prompting more detailed inquiries via information exchange.

Industry has broadly welcomed the convergence on a single standard of information exchange. Several jurisdictions had threatened to develop their own versions of FATCA and a common approach clearly simplifies implementation. The major question mark, however, remains how the US will approach the OECD’s CRS initiative. The US is unlikely to move away from FATCA and adopt the CRS process. The US’s position, however, is that the Model I IGAs entered into under FATCA ‘acknowledge the need for the United States to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions’.20 In spite of political commitment from the US to ‘advocate and support’ legislation to give effect to reciprocal information exchange, there is yet little prospect of any real progress here at the political level, although at the same time several non-US tax authorities are indicating that they are now receiving useful tax information from the US even if this is not yet as comprehensive as it would be under the CRS.

III BEPS – BASE EROSION & PROFIT SHIFTING

The other significant project that the OECD is working on is the BEPS programme. This is the umbrella term used for the OECD’s work on measures to inhibit the shifting of corporate profits to low-tax or no-tax jurisdictions where there is little or no economic activity. The OECD is currently in the process of developing a series of action plans covering various aspects of what is acknowledged to be a contentious and complex issue.21 Sufficient progress has been made, however, and the Treasury Department and the Inland Revenue Service have finalised a rule requiring US parent companies of multinational public and private companies to provide their financial data to the IRS on a country-by-country basis with other OECD countries.22 Tax authorities around the world are hoping that the intergovernmental exchange mechanisms will identify companies that are shifting their profits into tax havens, which would instigate further investigation.

The primary focus of BEPS is clearly on the corporate sector, but many private client structures will have a corporate component. The intention is clearly that corporate structures will now also be transparent and not used as tools of aggressive tax planning strategies to move income from one jurisdiction to another. The OECD and G20 are welcoming all interested countries and jurisdictions that are ready to commit to the BEPs programme.

IV OUTLOOK

The G5 launched an initiative for the automatic exchange of information on beneficial ownership in April 2016, following the Panama Papers leaks, to take decisive action against the ‘scourge of tax evasion’.23 The initiative also emphasised the need for the implementation of the Common Reporting Standard (CRS), to which 101 countries are currently committed; the early adopters must start reporting in 2017. The G5’s 14 April 2016 letter to finance ministers stated:

Of course as with the CRS, to be fully effective such exchange should be on a global basis. We therefore hope that you will support this initiative and that we can collectively call on the OECD, in cooperation with FATF, to draw up a new single global standard for such exchange. This should cover the robust identification of beneficial ownership, the range of entities and arrangements which should be covered by such exchange, timing of exchange and wider exchange procedures.24

At the G20 meeting in April 2016, discussions were also focused on the G20 tax agenda and the need to enhance transparency in tax matters and disclosure of beneficial ownership following the publication of the Panama Papers. The OECD issued a statement shortly thereafter:

The OECD and the Global Forum, in partnership with the Financial Action Task Force (FATF), have been mandated by the G20 and Anti-Corruption Summit to work on improving the availability of beneficial ownership to ensure effective implementation of the standard that will enable tax authorities to identify the true owners behind shell companies and other legal arrangements.25

Additionally, the anti-BEPS measures that have been implemented by the G20 and OECD are aimed at furthering the objective of retaining taxation in the appropriate jurisdiction where the profits have been generated.

The near-simultaneous implementation of major new processes for the collection of beneficial ownership information, the automatic exchange of tax information and improved transparency in the corporate sector, is likely to have significant consequences, both intended and unintended. The concept of ‘beneficial ownership’, always a problematic one in the trust context, is beginning to shift from AML to tax, with both FATCA and CRS using beneficial ownership, rather than tax liability, as the basis for the collection of tax information. Automatic exchange will also see information on wealth, rather than income, being reported, in many cases for the first time.

At the very least, this seems likely to generate many more queries regarding unexplained sources of wealth. In the long run, however, greater transparency as to both income flows and wealth holdings may also begin to influence how tax authorities structure the tax system to maximise tax yields. As intelligence improves on international tax-planning strategies, it seems inevitable that tax authorities will take action to block those they deem to be overly aggressive or otherwise unacceptable. The OECD has positively affirmed that, ‘tax matters and transparency are finally front and centre in public discussions about fairness, good governance and responsible business (and individual) conduct.’26

Footnotes

1 George Hodgson is interim Chief Executive of STEP.

2 ‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation’, Financial Action Task Force, Paris, 2012, www.fatf-gafi.org/media/faft/documents/recommendations/pdfs/FATF_Recommendations.pdf. Access date 24 July 2013.

3 Designated Non-Financial Business and Professions.

4 See: www.legislation.gov.uk/ukpga/2015/26/part/7.

5 Schedule 1A, Part 1, paragraph 6.

6 UK Prime Minister’s letter to the Overseas Territories on beneficial ownership, Published 25 April 2014, www.gov.uk/government/publications/prime-minsiters-letter-
on-beneficial-ownership/prime-ministers-letter-to-the-overseas-territories-on-
beneficial-ownership.

9 See: www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/National%20Money%20Laundering%20Risk%20Assessment%20%E2%80%93%2006-12-2015.pdf.

10 See: file:///C:/Users/ed/Downloads/_cr15170pdf.pdf.

11 See: www.whitehouse.gov/blog/2014/04/04/beneficial-ownership-legislation-proposal.

12 See: www.fatf-gafi.org/topics/fatfrecommendations/documents/derisking-goes-beyond-amlcft.html.

13 See: www.fatf-gafi.org/topics/fatfrecommendations/documents/derisking-goes-beyond-amlcft.html.

14 See: www.imf.org/external/pubs/cat/longres.aspx?sk=43680.0.

15 See: www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-
exchange-of-financial-information-in-tax-matters.htm.

16 See: www.oecd.org/tax/transparency/AEOI-commitments.pfd.

17 See: www.oecd.org/ctp/exchange-of-tax-information/ENG-Amended-Convention.pdf

18 See: www.oecd.org/ctp/exchange-of-tax-information/Automatic-Exchange-Financial-
Account-Information-Brief.pdf.

19 See: www.oecd.org/ctp/exchnage-of-tax-information/standard-for-automatic-
exchange-of-financial-information-in-tax-matters.htm,p66.

20 See: www.oecd.org/tax/transparency/AEOI-communications.pdf.

21 See: www.oecd.org/tax/beps-about.htm.

23 See: www.gov.uk/government/uploads/system/uploads/attachment_data/file/516868/G5_letter_DOC140416-14042016124229.pdf.

24 See: www.gov.uk/government/uploads/system/uploads/attachment_data/file/516868/G5_letter_DOC140416-14042016124229.pdf.

25 See: www.g20.utoronto.ca/2016/160415-finance.html.

26 See: www.g20.utoronto.ca/2016/160415-finance.html.