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. 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 have been 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 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.
A major development occurred in June 2018 when FATF published updated Risk Based Approach (RBA) guidance for the non-financial services sector.4 Three sets of guidance were made available for Trust Company Service Providers (TCSPs), lawyers and accountants. The RBA is central to the effective implementation of the FATF Recommendations. It means that supervisors, financial institutions, and TCSPs identify, assess and understand the money laundering and terrorist financing risks to which they are exposed, and implement the most appropriate mitigation measures. This approach enables them to focus their resources where the risks are higher. The original guidance was published in 2008 and was therefore out of date and in need of revision. It highlights the importance of supervision of beneficial ownership requirements. It also underscores how supervisory frameworks can help to ascertain whether accurate and up-to-date beneficial ownership information on legal persons and legal arrangements is maintained by the accountants and made available in a timely manner to competent authorities when required.
The United Kingdom'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 in 2016.5 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 Regulations require 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 Regulations therefore call 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.6 The Regulations apply 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.
In addition the UK Crown Dependencies (CDOTs), Jersey, Guernsey and the Isle of Man, have recently announced that they will voluntarily adopt public registers of beneficial owners by 2023. The CDOTs have always been fairly resistant to committing to a publicly accessible register until the requirement becomes a more mainstream global standard. Each jurisdiction will ensure that public access to a central register is implemented within 12 months of the EU's anti money laundering review in January 2022.
iii EU developments
Publicly accessible registers of beneficial ownership are also a key feature of the Fourth EU Anti-Money Laundering Directive (4 AMLD), which entered into force and appeared in the Official Journal in June 2015.7 The Directive, which was implemented by Member States on 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”'. A 'legitimate interest' is to be interpreted by each Member State but the general expectation is that most will allow public access, in line with the UK's PSC register 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'. Law enforcement and competent authorities will have full access to the central registry and a Member State may opt to allow public access to the register. HMRC's new online Trust Registration Service (TRS) was launched in July 2017. The TRS compels trustees of an express trust that incurs 'relevant' tax liabilities to register their trust, or update existing trust data on the register. The relevant taxes are UK income tax, capital gains tax, inheritance tax, stamp duty land tax, stamp duty reserve tax, and (in Scotland) land and buildings transaction tax. The United Kingdom was the first of the Member States to comply with its 4 AMLD obligations and some Member States have still not managed to transpose the Regulations into their national law.
The Directive additionally requires the Commission to identify third-country jurisdictions that 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 European Union and significant financial centres to adopt similar AML procedures to those laid out in the Directive.
In the wake of terrorist attacks in France and the Panama Papers data leak of 2016, the European Union decided to revise the 4 AMLD before it had even been implemented.8 On 14 May 2018, following several months of trialogue negotiations, the Council of the European Union adopted the amendments now known as the Fifth Anti-Money Laundering Directive (5 AMLD).9 The Directive will give full public access to information on the beneficial owners of firms operating within the European Union, although the corresponding information for trusts will be limited to 'express trusts' and those with a 'legitimate interest', the definition of which is governed by the law of each Member State where the beneficial ownership information of the trust or similar legal arrangement is registered. It is unclear how the United Kingdom will choose to interpret these definitions and whether access will be extended beyond the scope of law enforcement agencies and competent authorities. It is anticipated that the UK will only allow access to the trust information to those who can prove their 'legitimate interest' by way of evidence of terrorist financing or money laundering.
The United Kingdom's decision to leave the European Union creates uncertainty as to the future force of EU directives in the United Kingdom. It is likely that it will be excluded from negotiations regarding EU regulations but may nevertheless be pressured into implementing EU legislation to preserve access to EU markets. In the meantime, it appears that Europe has moved decisively towards publicly accessible registers to meet its obligations under the revised FATF Recommendation.
The United States continues to take a different approach. It is now an FATF requirement for governments to conduct an AML national risk assessment and it has published its first such assessment since 2005.10 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 United States, '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'.
However, in June 2018, the US Department of the Treasury Financial Crimes Enforcement Network (FinCEN) published an advisory to financial institutions reinforcing their obligations under the Bank Secrecy Act to report suspicious transactions by political figures and related persons across the United States: 'Theft and other bad acts committed by corrupt senior foreign political figures undermine democratic institutions, destabilise economies, and erode societal foundations,' said FinCEN Director Kenneth A Blanco. 'FinCEN is committed to continuing its fight against corruption and those who use the US financial system to further their nefarious activities at the expense of innocent people.'11
The FATF recently conducted mutual evaluations of national implementation of the FATF Recommendations. A mutual evaluation report provides a detailed analysis of a country's system in place designed for preventing criminal abuse of the financial system.
The UK's mutual evaluation took place in autumn 2018 and received the highest rating possible as well as a rating of 'substantial' in a further four areas. The UK was found to be 'substantially effective' (the second-highest rating) in relation to beneficial ownership transparency. The UK was also found to have a system in relation to trust beneficial ownership, which is entirely technically compliant with FATF's recommendations. However, areas were identified where there is need for further work including reforming the UK's Suspicious Activity Reporting regime and improving the quality of information held at Companies House.
In addition, from 2021, overseas entities wishing to own UK property will need to identify and register their real owners. Entities failing to comply will be unable to sell, buy, lease or mortgage UK property and could face criminal sanctions and fines.
II OECD GLOBAL FORUM ON TRANSPARENCY AND 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.
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.
i Common Reporting Standard
The OECD's model, generally known as the Common Reporting Standard (CRS), is based heavily on the Model 1 intergovernmental agreements (IGAs) many jurisdictions have concluded with the United States. The CRS model was first published in outline in February 2014, with further details being published in July 2014.12 The OECD's approach has now been endorsed by all 34 members of the OECD and in total over 100 jurisdictions have committed to first exchanges by 2017 and 2018 with an additional eight undertaking first exchanges by 2019/2020. The only major outlier is therefore the United States, 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;13 currently, 121 jurisdictions participate in the Convention, including all members of the G20 countries, all OECD countries and an increasing number of developing countries. 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 being currently worked on 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'.14 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'15 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 is 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.
Industry has broadly welcomed the convergence on a single standard of information exchange. Despite the OECD's attempts to create a global standard for the automatic exchange of information, a significant number of jurisdictions have introduced local variations to reporting requirements. This inconsistency has hindered financial institutions in preparing for CRS. Several jurisdictions had threatened to develop their own versions of FATCA and a common approach clearly simplifies implementation. The major question mark, however, remains over how the United States will approach the OECD's CRS initiative; it is unlikely to move away from FATCA and adopt the CRS process. The US position, however, is that the Model 1 IGAs entered into under FATCA 'acknowledge the need for the United States to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions'.16 In spite of political commitment from the United States 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 United States even if this is not yet as comprehensive as it would be under the CRS.
ii Model Mandatory Disclosure Rules
The OECD issued the Model Mandatory Disclosure Rules (MDR) for CRS Avoidance Arrangements and Opaque Offshore Structures in 2018. These rules, which are based on the BEPs Action 12 report, require lawyers, accountants, financial advisers, banks and other service providers to inform tax authorities of any schemes that they have advised or put in place for their clients in order to avoid reporting under CRS or to prevent the identification of the beneficial owners of entities or trusts.
The OECD reinforces the purpose of the MDR:
As the reporting and automatic exchange on offshore financial accounts pursuant to the CRS becomes a reality in over 100 jurisdictions this year, many taxpayers that held undeclared financial assets offshore have come clean to their tax authorities in recent years, which has already led to over 85 billion of additional tax revenue.17
The other significant project that the OECD has been 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.18 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.19 Tax authorities around the world are hoping that the intergovernmental exchange mechanisms will identify companies that are shifting their profits into tax havens, which will 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 have welcomed all interested countries and jurisdictions that are ready to commit to the BEPS programme and, to date, over 125 countries and jurisdictions are collaborating to implement the BEPS.
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.
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'.20 In short, global transparency, by way of reporting and exchange of tax information, continues to dominate the industry and remains a high political focus.
1 Emily Deane is STEP technical counsel.
2 'International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation', Financial Action Task Force, Paris, 2012, http://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html. Access date 24 July 2013.
3 Designated non-financial businesses and professions.
6 Schedule 1A, Part 1, Paragraph 6.