Andres Knobel ■ Dubious arguments to defend secrecy, even as automatic information exchange booms


Updated: an earlier version of this blog incorrectly referred to the legal opinion of the Advocate General as belonging to Luxembourg rather than to the European Court of Justice.

For years, we have advocated the automatic exchange of bank account information across borders. The previous “on request” system, where a country had to make specific requests about specific taxpayers already under investigation, was only slightly better than nothing, as our 2009 report explains.  Sadly, even in 2020 amid a global boom in automatic exchanges of information (on all resident taxpayers,) major tax havens are still throwing up obstacles wherever they can.

Two recent cases in Luxembourg (known as C-245/19 and C-246/19) provide a recent example. Spain has asked Luxembourg to share information on contracts signed between some companies, as well as bank account records from one company.  The Advocate General (AG) Kokott of the Court of Justice of the European Union (ECJ) has presented a legal opinion that third parties (the companies and the bank) should be able to seek judicial review to reject the exchange of their information. More surprisingly, perhaps, she has proposed worsening two secrecy mechanisms.

The first one is about widening the concept of “fishing expeditions”. While many tax authorities face staff and budget cuts, this extract below describes all the hoops that the requesting tax authority has to jump through before they dare to request information from Luxembourg or any other country. (Of course, the opinion is based on Swiss practices:)

Different factors should therefore be taken into account in order to distinguish the information likely to be relevant from the research which is carried out irregularly in all directionsThe behavior that the taxpayer has adopted in the past also matters. To this end, the Swiss federal court rightly demands concrete evidence attesting to a breach of tax obligations. This would be the case here, for example, if the taxpayer had not previously declared accounts or relationships with third parties related to him or if he had given contradictory indications in the tax procedure. Finally, the elements which the applicant tax authorities have investigated so far are also important. For example, undeclared business networks with unclear reciprocal financial flows may create a particular need for information. The same applies when the investigations carried out so far have given contradictory results which can only be clarified with the assistance of Bank A.

In the present case, the Spanish tax authorities must therefore set out, for example, elements which lead them to believe that the taxpayer has other accounts at bank A, that there are other undeclared income and which allow it to assume transfers of assets between taxpayers and companies B, C and D.

Without these concrete elements, a request for information aiming to find in a bank all the accounts of the taxpayer and all the unspecified accounts of third parties linked in one way or another to the taxpayer, is not regular with regard to of Directive 2011/16 but is an all-out search (consisting of “going fishing”). (translated from original in French)

A prohibition on “fishing expeditions” were a staple tax haven response during the heyday of the previous (near-useless) “on request” system of information exchange, which we had hoped to see the back of.

More problematic, though, is a second secrecy argument, whose implications go far beyond exchange of information. It relates to how society treats legal persons (such as companies). Societies around the world currently give legal persons rights as if they were (natural) persons: a company, for instance, may sue or be sued, own assets in its own right, enter contracts or sell goods or services, even if many of them are permitted to hide the natural persons (called “beneficial owners”) who operate behind them.

Now, the Advocate General to the European Court of Justice based on other case law suggests that legal persons should also be entitled to the rights of privacy and family life. This conclusion with huge implications seems to have been reached, without any clear reasoning:

Article 7 of the Charter contains the fundamental right of everyone to respect for his private and family life. With regard to the processing of personal data, it extends to any information which concerns a specific or determinable natural person. The protection of privacy also encompasses professional or commercial activities, including the transactions which result therefrom. This includes information relating to bank data.

As such, legal persons can also invoke section 7 of the Charter. However, the justification for an encroachment on section 7 of the Charter may obey, for legal persons, to other criteria than those applicable to natural persons…

In the present case, information relating to bank accounts and assets has been requested, which also concerns companies B, C and D. These legal persons may therefore rely on Article 7 of the Charter. (Translated from original in French)

(Here’s an official English summary of the case suggesting the same conclusion.)

As regards concerned third parties (here, several companies), the Advocate General points out that under the case-law the fundamental right to the protection of personal data (Article 8 of the Charter) relates in principle to natural persons. Legal persons may, however, in any event rely on the fundamental right to respect for private and family life (Article 7 of the Charter) where, as here, information concerning bank accounts and assets is demanded.

The argument is of course fallacious. It is fine that natural persons are entitled to privacy in their private lives (just as your doctor shouldn’t publish details of your ailments on the internet.) But to then assert that a legal person should enjoy the same privacy protections as a natural person is just that: an assertion. It does not follow at all.

A personal bank account is covered by the protection of private and family life, but not because it’s a bank account: it is because it belongs to a natural person.

Here the Advocate General isn’t saying that a natural person taxpayer would be entitled to extend their protection of private and family life to their assets and bank accounts, but that a company is entitled to the protection of private and family life because it has assets and bank accounts (and thus is entitled to seek judicial review because the case affects the protection of private and family life).

The right is for natural persons and their belongings, not for things and then extended to whoever owns them.

Societies need to start claiming back limits to the infinite freedoms of legal vehicles that enable them to enjoy secrecy, limited liability or full immunity, private property and now also the protection of family life.

Image courtesy of Kristina Flour/Unsplash

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