Guest blog: how the European Trade secrets Directive will silence tax whistleblowers

From Corporate Observatory Europe, the basic background for our guest blog:

“The proposed EU legislation on “Trade Secrets Protection”, which the European Parliament will vote next April 14, creates excessive rights to secrecy for businesses: it is a direct threat to the work of journalists and their sources, whistleblowers, employees’ freedom of expression, and rights to access public interest information.”

Now Antonio Gambini of CNCD 11.11.11, a Brussels-based network focusing on globalisation, has written a guest blog for TJN, outlining the issues in stark detail. He looks at the general wide relevance of the directive, which is almost but not quite set in stone – then he looks to see how it would affect tax whistleblowers such as Antoine Deltour, the so-called “Luxleaks” whistleblower.  Read Antonio’s blog below and sign the petition

The European Trade secrets Directive: how to silence tax whistleblowers

By Antonio Gambini

The stated objective of the trade secrets directive, proposed by the European Commission, is to protect EU businesses from industrial espionage and other form of unfair competition.

Who could argue against that? It is indeed unfair for businesses that have invested and worked to create technical know-how and other competitive advantages then see competitors steal their secrets — and therefore their present and future profits.

The problem is that the proposed EU law goes well beyond that.

The first issue is the definition of “trade secrets”. According to the Directive, anything can be a “trade secret”: the only real criterion is that this secret needs to have “a commercial value”. For instance, companies do not need to proactively identify which information they consider a trade secret.

The second concern is the type of actions and behaviors that the text will render unlawful: all forms of “acquisition, use and disclosure of trade secrets” without the consent of the “trade secrets holder”. If the directive was only about protecting companies from unfair competition, it would have been better to target the economic or commercial exploitation of such unlawfully obtained secrets. The directive goes well beyond the legitimate protection of businesses against unfair competition.

This becomes even clearer when we consider the fact that the author of the “unlawful acquisition, use and disclosure of trade secrets” does not have to be the original “thief” of the trade secret. Third parties who “at the time of use or disclosure, knew or should, under the circumstances, have known that the trade secret was obtained from another person who was using or disclosing the trade secret unlawfully “ are also targeted.

Whistleblowers, journalists, NGOs, trade unions — or any kind of concerned citizens groups who reveal a trade secret (without the consent of the “trade secrets holder”), for instance to denounce a form of misconduct from the business in question, would therefore be in breach of this new legislation.

The proponents of the trade secrets directive react against this by highlighting the exceptions and other provisions of this directive that are supposed to protect such legitimate cases of trade secret disclosure.

The “whistleblower” exception is defined in the original text of the Commission as follows: “for the purpose of revealing an applicant’s misconduct, wrongdoing or illegal activity, provided that the alleged acquisition, use or disclosure of the trade secret was necessary for such revelation and that the respondent acted in the public interest”.

In effect this means that the whistleblower needs to meet three criteria: 1) the misconduct, wrongdoing or illegal activity 2) the disclosure of the secret was necessary 3) the whistleblower acted in the public interest.

How would this affect Antoine Deltour?

In order to ascertain the impact of this on tax-related whistleblowing cases, let’s look at the famous case of Antoine Deltour, the whistleblower who disclosed secret tax deals between the state of Luxembourg, PWC and PWC’s clients in the notorious “Luxleaks” scandal.

The tax deals revealed can be considered “trade secrets”, because they were indeed secret and can have a commercial value. PWC competitors (Deloitte or Ernst & Young for instance) would be able to make a profit out of selling PWC innovative tax arrangements and accounting tricks (all assumed to be perfectly legal of course) to their own clients.

In order for Antoine Deltour to benefit from the “whistleblower” exception, he would need first to prove the “misconduct, wrongdoing or illegal activity” of PWC. That might very well prove impossible. “Tax rulings”, a.k.a. secret sweetheart deals between companies and the state of Luxembourg are in no way “illegal”: they are the very lawful implementation of the Luxembourgish tax code.

The only possible way to characterize these deals as “illegal” would be to refer to the recent and innovative crack down by the European Commission against some tax arrangements (including some secret tax rulings) considered as “illegal state aid”. But the guilty party in an illegal state aid is the state, not the beneficiary of the illegal subsidy (although he might have to hand back the money), whilst the directive demands the author of the illegal behavior to be the applicant, in this case PWC.

The second condition, the necessity of the disclosure of the trade secret, would not be so easy for Mr. Deltour either. One could argue for instance that he could have launched a political campaign for the abolition of tax rulings, or that he could have informed the anti-state aid services of the European Commission in Brussels instead of publishing the tax rulings.

The third condition is difficult to manage. Should we consider the internal state of mind of Mr. Deltour at the time of the breach of secrecy? What would be the point of that? What is certain is that the revelations themselves were a powerful argument in the public debate, and that they did contribute to a whole series of important reforms in the field of taxation, including new rules on exchange of information between tax authorities on tax rulings. In that sense the Luxleaks were indeed an important contribution to the public interest.

The legal affairs committee of the European Parliament did manage to improve the text a little. In its version, the second condition, that of the “necessity”, disappears, but the other two conditions remain. For a whistleblower such as Mr. Deltour that would not be enough to qualify for legal protection.

Antoine Deltour is currently being prosecuted by Luxembourg, his trial is scheduled to start in the coming weeks, on charges related to Luxembourgish law, independent and preexistent to the trade secrets directive. It is important to note however that Edouard Perrin, the journalist that helped publish Mr. Deltour’s revelations, is also accused in the same trial.

This fact should help us understand the other exception to the directive, the “legitimate use of the right to freedom of expression and information” one. This second exception is supposed to protect journalists such as Mr. Perrin who are basically just trying to do their job, informing the public. Here the problem is the reverse of the whistleblowing exception: instead of being too detailed it is too vague.

The directive does not further define what is a “legitimate use of the right to freedom of expression and information”, nor indeed what is such a right nor such a freedom. One needs therefore to refer to international and European treaties and texts related to such basic human rights as freedom of the press and freedom of expression. The problem is that a state such as Luxembourg is an old European liberal democracy, and as such is signatory to all major human rights treaties and systems. Apparently this does not stop Luxembourg from putting a journalist on trial for just doing his job. This exception in the directive might prove to be just as inefficient.

The European Parliament is scheduled to vote on this directive quite soon, somewhere between the 12^th and 14^th of April. If approved by a simple majority, this Directive will most probably enter into force very rapidly, considering that the other branch of the EU legislating power, the Council of 28 Ministers form the member States has already approved the text.

People committed to tax justice and transparency should therefore mobilize quite soon, before the revelation of all forms of legal but deeply unfair tax avoidance strategies and cases become illegal.

More helpful information on the draft directive and on actions you can take against it can be found from the Corporate Europe Observatory: a summary here; a factsheet here; and an appeal here. 

And please also sign the petition.