OECD rules vs CRS avoidance strategies: not bad, but short of teeth and too dependent on good faith

The OECD’s Model Mandatory Disclosure rules for CRS avoidance strategies are not bad in our opinion, but short of teeth and far too dependent on good faith by rogue intermediaries and taxpayers…

On March 9^th, 2018 the OECD published the Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures and an FAQ. They are a set of rules to be adopted by interested countries, requiring intermediaries and taxpayers to report on schemes that could be used to avoid reporting under the Common Reporting Standard (CRS) for automatic exchange of banking information. This is a step in the right direction, including the intention to consult widely. (Yet as we’ve pointed out before, and continue to do so: the fact that the standard has been drawn up without wide consultation, and by excluding developing countries, is still casting its shadow over it all, as issues of relevance continue to be ignored – see more details here, here and here). We sent our proposals on the Mandatory Disclosure Rules through the Financial Transparency Coalition. Unfortunately, none of our proposals were taken into account.

The pros…

The Model Mandatory Disclosure Rules aren’t bad at all. Given the infinite creativity of gatekeepers when it comes to abusing laws, these model rules are rightly broad, including under its scope any arrangement that “is reasonable to conclude that it is designed to circumvent or is marketed as, or has the effect of, circumventing CRS Legislation or exploiting an absence thereof” (see page 14 of the Model rules). Examples of what such arrangements may look like are also provided: use of products that aren’t strictly financial accounts (thus not under the CRS scope) but that are very similar in practice to them, the transfer of money to types of accounts, types of payments, types of financial institutions or to countries that aren’t covered by the CRS, or exploiting/undermining weaknesses of the CRS (e.g. the due diligence process) to prevent identifying the account holder, the beneficial owner or all of their residences. The new rules also cover the use of offshore structures used to hide the beneficial owner of a financial account.

The cons…

The Model rules aren’t mandatory for countries. Given the track record of many tax havens and secrecy jurisdictions that are used to tweaking even mandatory rules (e.g. Switzerland), ensuring the implementation and enforcement of the Model rules in all countries will certainly be a challenge, to say the least.

Even for countries that do implement the Model rules, sanctions against non-compliant intermediaries (people and entities offering avoidance schemes) and taxpayers are left open for each country to decide. The OECD gives some suggestions, e.g. fines that involve a percentage of the scheme’s fees/values avoided are better than fixed penalties. Daily penalties are also promoted. Still, we had proposed non-monetary penalties to be mandatory, not mere suggestions (e.g. loss of licence, prohibition to engage in business, criminal sanctions, etc.). Also, we proposed whistle-blower protection and incentives to boost disclosures, but this wasn’t even mentioned as an option by the OECD.

On top of this, moving money to the U.S. is not considered a scheme to avoid the CRS if the country of residence of the account holder has a FATCA-based Intergovernmental Agreement 1A with the U.S. (see page 25 of the Model rules). Last time we checked, the US only offers at best partial reciprocity. The main problem with this word “partial” is that the U.S. will not share with other countries any information at the beneficial ownership level. It is thus rather contradictory to establish 47 pages of rules against schemes that try to hide the beneficial owner, but then consider that it’s perfectly fine to move the money to the U.S., thus hiding the beneficial owner of the account.

The elephant in the room

One might wonder – what’s the point of asking intermediaries and taxpayers to disclose their avoidance strategies? Why not ask them directly not to avoid the CRS at all (as the law should already do)? It’s pretty obvious that these rules aren’t enough to prevent avoidance strategies from taking place, but we agree with the OECD that these rules are still useful. They are necessary to make it explicit that abusing the letter of the law to avoid the CRS is not allowed. This should create some deterrent effect, at least for some people and big institutional entities (unless they want to end up shutting down like Mossack Fonseca after the Panama Papers).

But what about those immune to the deterrent? We never tire of repeating this – publish statistics! We’ve been calling for statistics since 2014 and then in 2017 we proposed and explained a template for CRS statistics that would address these avoidance schemes. The main point of our statistics (that would not breach any confidentiality because all data would be aggregated by country of residence) is that we need information not only on what is being reported, but also on what is not being reported: how many accounts are held by excluded accounts, how many are held by non-reporting financial institutions or by non-reportable persons, etc. These statistics may not be enough to prevent avoidance from taking place, but they should give enough insight and data into avoidance strategies and where the money is flowing to. For example, statistics could show that that most accounts are being closed in country A and many new accounts appear in country B, or that in country C the values held by accounts (legally) excluded from reporting under the CRS keep increasing year after year, etc. See more details on how statistics could be used to detect CRS avoidance schemes here (pages 37-52).

New proposals based on the published Model rules

We would of course favour our general anti-avoidance proposals be included as part of the CRS rules (e.g. on residency and citizenship by investment schemes, our call for account holders that are considered “active” entities to also be looked through so that their beneficial owners are reported, etc.). However, here are a few specific proposals that the OECD should consider in relation to the Model rules recently published:

1. Retroactive period: the Model rules’ scope covers avoidance schemes offered after October 2014 and that avoided reporting of an account that had a balance of at least USD 1.000.000. Instead, the rules should require reporting of schemes since July 2014 when the CRS was published (not October 2014 when countries committed to it) and eliminate the 1.000.000 USD threshold. If an avoidance scheme was provided, better to get intel about them than to pretend they didn’t happen.
2. Require nil returns by all intermediaries and taxpayers: Instead of asking intermediaries and taxpayers to report information only when they have something to disclose, the Model rules should require everyone to always report information. They would report either the avoidance scheme itself or they should declare in writing that they have nothing to report because they haven’t engaged in any scheme to avoid the CRS.
3. Publish details of avoidance schemes: the description of the avoidance scheme and the total value that has been not reported as a consequence of the avoidance scheme should be publicly available (e.g. the OECD could collect data on all schemes and publish this information, such as “transferring money from jurisdiction A to the US resulted in 100 million USD not being reported under the CRS”). Only strictly confidential information related to the scheme (e.g. the name of the taxpayer involved) should be exchanged automatically or spontaneously among authorities. Anything that doesn’t identify a specific taxpayer/account holder (e.g. aggregate information) should be publicly available.
4. Stop the overreaching secrecy awarded to lawyers. This major issue goes beyond the CRS, and involves money laundering and corruption. A lawyer’s client confidentiality should only cover any data strictly involved in defending a client in the context of a lawsuit/judicial proceeding. Anything else, especially the lawyer as a corporate service provider, as trustee, as nominee shareholder, as tax planner, etc. should not be subject to professional secrecy. Lawyers should be obliged entities and report suspicion transactions. Any country failing to make this distinction should be blacklisted. In the meantime, countries where lawyer’s secrecy is still absolute should still be required to report, not a nil return, but the fact that they have provided an avoidance scheme and the values that have been avoided (without revealing the client’s identity). However, if the client doesn’t report themselves to authorities (as the Model rules require), then authorities should be able to compel the lawyer to reveal the name of the client.
5. Non-cooperative jurisdictions: any country failing to implement the Model rules, ideally with the amendments proposed here, should be considered a non-cooperative jurisdiction and other countries should take counter-measures against them (e.g. prevent financial institutions and resident taxpayers from engaging with service providers and financial institutions from those non-cooperative countries). For example, G20 countries that will be meeting this year should lead by example and commit to implement these rules.