Nick Shaxson ■ Insurance sector seeking to trick the OECD with giant secrecy loophole?


Update: with Gibraltar / Bermuda shenanigans.

Last February the OECD, which has been mandated to set global financial transparency standards, presented a major report on a new global standard for transparency and to fight the scourge of tax evasion. We broadly welcomed the project, but noted that it has many shortcomings.

The full details of those global standards are still being put together, including many potent and often secret interventions from powerful lobby groups. Well, has just published some details of one of these interventions, this time by the insurance industry. And – while the details are a tad technical in parts – it’s a corker. This is tremendously important, since the OECD’s project is going to be the dominant global standard for transparency.

“The Global Federation of Insurance Associations (GFIA) has called for a revision to the Organisation for Economic Co-operation and Development’s draft commentaries on its new common reporting standard (CRS) to relax rules on the treatment of pre-existing cash value insurance and annuity accounts.

The GFIA argues that: “Pre-existing cash value insurance and annuity contracts should be excluded from the scope of CRS to ensure a reasonable and proportionate compliance burden relative to the very low level of tax evasion risk these policies present.”

Whenever the words ‘exclude from the scope’ come up in any text from the financial industry, it must be examined  carefully.

The crowbar these insurers are trying to insert into the proceedings, it seems, goes like this.

What we are talking about here, very substantially, is ‘insurance wrappers’ – classic tax evasion (and criminal) devices, pushed and facilitated by the likes of Luxembourg, Ireland, Liechtenstein and various others. (We have written about them before: see Section 3.2 here for a brief explanation, and their assertion that they present a “very low level of tax evasion risk” is pure nonsense.)

Now one could have an argument about whether or not the OECD’s new transparency rules should cover new insurance policies only, or be retroactive and cover existing policies too. (No prizes for guessing where we would stand on this: transparency is transparency, and we don’t see why existing tax evaders should get a free pass.)

The GFIA is sweetly suggesting that it is only fair to exempt existing policies, citing bothersome and onerous compliance burdens and so on.

We sincerely hope the OECD doesn’t buy this line. Consider this.

If there is an exemption for existing policies, then there has to be a cut-off date, after which new policies will be in the scope of transparency, and old policies will be out of scope.

And here’s one easy trick to abuse that. After the cut-off date, you simply top up your existing policy with new millions! Because it’s an old policy, it will remain exempt. People could be managing fortunes for decades outside the scrutiny of their tax authorities, if these insurers get their way.

Not only that, though: you can assign your insurance policy to someone else: your children, perhaps. And if it was set up before the cut-off date, then you won’t get bothered by transparency.

Or, one could imagine some devious rent-seeker in plush lawyers’ offices in Luxembourg setting up hundreds of insurance policies in her own name before the cut-off date, each containing one Euro, and then assigning them, one by one, to all the tax evaders and criminals who want to hide their fortunes. The lawyer assigns the policy to the crook, who then inserts $100 million, knowing that it will remain comfortably out of scope.

If they succeed, it will be a bonanza for the offshore insurance industry! Many aspects of the OECD’s project are quite strong on transparency, and the sector is presumably licking its collective lips at the prospect of all that tax-evading money exiting other products and coming whooshing over from those bits newly closed off to tax evasion, and into this gaping insurance loophole. No wonder they are so keen to influence the OECD.

Unfortunately, this is also one of the loopholes in the EU Savings Tax Amendments which are soon to come into force, and which needs fixing.

So how do you fix something like this? Surely – suuurely – you can’t expect the holder of a very old insurance policy to have to knuckle down to such ‘burdensome’ requirements? Think of the damage to their dignity! In fact, the CFIA says as much:

“Given the long term nature of life insurance, contracts may extend for more than 60 or 70 years. As a result, contracts and administration systems for pre-existing life insurance policies and annuities may have been designed many years ago, prior to any systems for the automatic exchange of information. Accordingly, the information necessary to identify a foreign tax person is often not available for review, as existing systems were not designed to capture and store this data or to permit an electronic search of such data. Furthermore, the number of policies in force makes any manual searching practically impossible.”

To summarise that last part of their sentence, they are saying they should be exempt from transparency because they just can’t find out who those darned policy holders are. Crackdowns are just too tough for these vulnerable and poverty-stricken global insurance giants.

Well, in fact, it doesn’t need to be hard at all. There is a very simple way that this can be tackled, jumping neatly over all those difficulties.  Don’t look at the date when the insurance policy came into force. Look at the date when policy premiums were paid. The moment a new premium is added to the policy – then the whole thing comes into scope, as it is clearly an active policy.

Let’s hope the OECD is wise to this one. They haven’t been particularly good at consulting with ‘independent’ voices on this issue, in contrast to the schmoozing of interest groups that we’ve been aware of. Will it be different this time?

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