Automatic Information Exchange is not the answer!

June 7: We’ve updated this blog, to make changes to the beginning of the article, which required some clarification.

Recently the British, German, French, Italian and Spanish finance ministries issued a statement in which they said:

“We commit to establishing as soon as possible registers or other mechanisms requiring that beneficial owners of companies, trusts, foundations, shell companies and other relevant entities and arrangements are identified and available for tax administration and law enforcement authorities.”

And then, more importantly for the purposes of this blog, they add:

“As a first step we are launching a pilot initiative for automatic exchange of such information on beneficial ownership.”

Which on the face of it, might seem like a good idea. Now we have in the past welcomed the approach of automatic information exchange of banking information, notably via the OECD’s Common Reporting Standard, which will start operation next year.

But automatic Information Exchange (AIE) of beneficial ownership of companies, trusts and other entities is different. If it ends up replacing the much needed public registries of who really owns legal structures, then it could be a bad thing.

AIE is a transparency improvement if it refers to information that needs to be kept confidential. It is certainly better than the international standard currently being used, where countries exchange confidential[1] information “on request” where you have to identify the taxpayer and often to prove the relevance of the request (which are usually impossible to find out about without a leak), and you have to overcome many other time-consuming hurdles.

But if it serves as a replacement for (or alternative to) data that should have been public, such as information on who really owns a company or trust, or where multinational companies have operations, or secret tax rulings to allow a company to escape taxes abroad – then it could represent a step backwards.

There is an agreement, at least, that information about the owners of companies and other entities is relevant in the fight against corruption, money laundering and tax evasion. The Panama Papers, several research documents, and common sense, are sufficient to show that if someone can hide behind layers of anonymous companies, trusts and foundations, they can easily commit crimes without risking being caught.

Now, Panama Papers and many other leaks show that instead of “honest people fearing being kidnapped and political opponents to dictatorships” (some common arguments to justify tax havens, debunked by a TJN writer in the Washington Post recently), it is those very same politicians, dictators and crook businessmen who are actually using anonymous entities.

So why should this vital information for democracy and accountability be kept confidential, even if it is exchanged automatically? Was this really the best that the recent UK anti-corruption summit could come up with?

Ponder for a moment: how useful is it for a dictatorship to information about its elites’ beneficial ownership, if the rest of society cannot find out?   Or even this: what about those supposedly well-governed western democracies that are slashing the budgets of their own tax administrations?  Tax administrations need to be better resourced: since the development of automatic information exchange of bank information (the OECD’s CRS) in 2014, more and more information is sought to be exchanged automatically:

• Country-by-country reports (as part of the OECD’s Base Erosion and Profits Shifting, or BEPS, project to tackle corporate tax cheating; however, this data should also be public)
• Hitherto secret tax rulings (guess what? This should also be public)
• Now also: information on beneficial ownership?

Beneficial ownership information is undoubtedly also relevant information for corruption, evasion, money laundering, market competition and many other issues that democracy, justice and the rule of law depend on.

Central registries – complementing automatic exchange of information – are the best way of getting beneficial ownership for all types of entities and arrangements, such as trusts,

(i) created under the laws of a country, or

(ii) operating in that country (maybe owning a house, opening a bank account or selling goods or services)

Such registries — public registries — are the best way to ensure access not only by authorities that need the information, but also by regulated entities (such as banks) which use this for their customer due diligence (to ensure there is no money laundering), and finally by society at large (NGOs, journalists, etc.).

Not only is this the best option to ease access, but it is also the cheapest option, and it ensures government accountability. Otherwise, authorities will need more budgets, not just to run the processes but also to verify the information that might otherwise rest with the eyes of all of society.

If politicians are interested in automatic information exchange, they should close the loopholes so that at least it will be effective for access of bank account information. Otherwise, one might be forgiven for thinking they are just trying to put too much onto their plate, as a way of eventually being able to justify why they can’t do anything right.

END

[1] What is considered “confidential” depends on the culture. For most countries, bank account information falls under this category, and it is reasonably accessed only by authorities. Tax information (someone’s income and tax paid) is trickier. While some believe this should be as secret as medical records, it is actually available in most companies’ accounts (which are fully public for companies listed in a stock exchange, and also available in paper for most companies registered in a commercial registry). Scandinavian countries actually offer tax information freely and online even on individuals – and so far both Sweden and Norway seem to be doing pretty well despite this “outrageous” feature. In contrast, while case law is a source of law in many Common Law countries, court proceedings and records are actually confidential in other places (i.e. Saudi Arabia).