The Private Wealth & Private Client Review: OECD developments
i OECD developments
The OECD is 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 (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 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 the competent authorities. Countries are also required to ensure that one or more natural persons, or designated non-financial businesses and professions, are authorised by the company and accountable to the competent authorities for the provision of beneficial ownership information to the competent authorities and for giving assistance to the competent authorities.
A major development occurred in June 2018 when the FATF published updated risk based approach (RBA) guidance for the non-financial services sector.3 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 the 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 2016.4 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 the competent authorities. Thus, the Regulations require companies to hold information on their own beneficial ownership and to 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.5 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 confirmed 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 AML review in January 2022.
In 2020 the FATF announced its intention to review Recommendation 24 and its implementation, which may lead to a comprehensive overhaul of the system of beneficial ownership. It has been noted that the application of the rules around beneficial ownership is complex due to confusion around the identification of natural persons, which can lead to the rules not being applied correctly, resulting in inaccurate information being held. The FATF launched a public consultation in June 2021 that invites comments in relation to Recommendation 24 and the transparency and beneficial ownership of companies and other legal persons; the consultation closes at the end of August.
iii EU developments
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 (5AMLD).6 The Fifth Directive updates the EU's approach to tackling money laundering and mandates the use of accessible registers of beneficial ownerships for trusts, but leaves the final decision on who will be able to obtain the information to each Member State. In the UK, the records will be accessible by law enforcement agencies, any UK obliged entity that enters into a business relationship with a trust, and anyone who can show that he or she has a legitimate interest in the data. An exception is that if a trust has a controlling interest in a non-EU company, then anyone will be able to access the information by making a written request and no legitimate interest is required. A trust will be deemed to hold a controlling interest in any corporate or other legal entity when the trust has 25 per cent or more of either the voting shares or other means of control over that entity as defined in the PSC guidance. It is currently unclear how legitimate interest applications will be dealt with by the government since legitimate interest is not defined within 5AMLD. The government will need to decide whether requests for trust data meet the definition of legitimate interest. The current train of thought is that those with a legitimate interest should be limited to people with active involvement in AML or counter-terrorist financing activity, or those who have reason to believe or have evidence that a particular trust or person is involved with money laundering or terrorist financing.
There are already discussions ongoing in relation to the implementation of 6AMLD and whether it will compel Member States to have publicly accessible registers, rather than leaving it to their discretion as it currently stands.
However, 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 2005.7 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'. Instead of registers, 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.'8
The FATF continues to conduct 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 that is entirely technically compliant with the 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.
2021 has been a busy year for the FATF, which has conducted a fourth round of mutual evaluations. New Zealand has been evaluated this year and the report states that its measures to combat money laundering and terrorist financing are delivering good results, but the country needs to focus more on improving the availability of beneficial ownership information, strengthening supervision and implementation of targeted financial sanctions. Other countries have had their follow-up reports undertaken, such as Barbados, Pakistan, the Cayman Islands, Bhutan, Denmark, Nicaragua and Jamaica, and have been informed by the FATF that they will either be moved to enhanced follow-up or remain in enhanced follow-up status.
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 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 2014.9 The OECD's approach has now been endorsed by all 34 members of the OECD. 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;10 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, as 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'.11 It is notable, however, that 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 that 'developing countries may face particular capacity issues as regards automatic exchange of information',12 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 the 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 the CRS. The OECD has recently announced that it will launch a consultation review of the CRS in 2021. The purpose of the review is to enhance the general efficiency and operation of the CRS, and particularly the quality and usability of its data. In recent years there has been increasing use of innovative financial products that were not envisaged when the CRS was originally implemented. In addition, some gaps and ambiguities in the legislation have been identified, and the OECD believes the time is now right to review and consolidate it. Most jurisdictions would no doubt agree that it would be beneficial to reach a single and consistent view.
ii Model Mandatory Disclosure Rules
The OECD issued the Model Mandatory Disclosure Rules (MDRs) 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 on or put in place for their clients to avoid reporting under the CRS or to prevent the identification of the beneficial owners of entities or trusts. The disclosure of cross-border tax-planning arrangements under Council Directive (EU) 2018/822 (DAC6) came into force on 1 July 2020 and requires reporting of any persons involved in cross-border arrangements, including loan agreements, payments from a resident of one country to a resident of another, or putting funds in an offshore trust, if one of the hallmarks apply.
Following the conclusion of negotiations between the UK and the EU on a Free Trade Agreement (FTA), the government has confirmed that only arrangements that meet hallmarks under category D of DAC6 need to be reported in the UK, in accordance with the OECD's MDRs. The replacement of DAC6 will significantly reduce reporting requirements, although the disclosure of tax-avoidance schemes (DOTAS) will continue to apply in the UK. The government will begin to repeal the legislation implementing DAC6 in the UK and will implement the OECD's MDR as soon as practicable, in order to replace DAC6 and transition from European to international standards on tax-transparency. Most of the EU's Member States have now announced extensions to address the severe disruptions created by the covid-19 pandemic, which will allow the EU more time to comply with rules on cross-border information reporting.
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.13 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.14 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 in 2020, 135 countries and jurisdictions were 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 problematic in the trust context, is beginning to shift from AML to tax, with both FATCA and the 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'.15 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.
5 Schedule 1A, Part 1, Paragraph 6.