16 May 2016

CRS and beneficial ownership


In today's difficult economic climate, countries need more than ever to ensure that they collect all the tax revenues that are due to them in order to fund public expenditure and reduce public debt. The arrival of new technologies has made it easier to collect and exchange information to fight tax evasion.

As the Panama Papers have shown, financial information can be easily stored and retrieved electronically on a global scale. Unsurprisingly, therefore, Governments have been considering the introduction of a global system for the automatic exchange of information. Although the implementation of this system has proceeded at speed, and with minimal scrutiny, it raises major questions about several issues:

1. 'Fantastically corrupt countries'

David Cameron's unguarded comments to the Queen, which were caught on camera, are a stark reminder of the dangers faced by individuals in many parts of the world. Indeed, a number of countries that have embraced the OECD's global standard for information exchange regularly appear on international corruption and crony-capitalism indexes, such as the 2015 Corruption Perceptions Index (CPI) published by Transparency International and the 2016 crony-capitalism index published by the Economist. This raises serious concerns about the potential use of information obtained through automatic exchange, and it may not be a coincidence that a large number of corrupt countries that have joined the information exchange bandwagon.

2. The missing $951m – the issue of cyber-security

As David Cameron's private conversation with the Queen also shows, information that is intended to stay private can easily be intercepted and put to different uses. Recent news about cyber-security breaches – such as the attack on the SWIFT system that led to the unauthorised transfer of $951m (of which $81m could not be recovered) belonging to the National Bank of Bangladesh; and statistics released by the UK authorities showing that two-thirds of large UK businesses are hit by cyber-attacks and that the UK tax authorities are hit by 15m malicious emails annually (leading the government to pledge 1.9bn towards cyber-security) – clearly show the risks posed by automatic information exchange. The recent case involving TalkTalk (the UK telephone and broadband provider) shows the risk of data loss for customers (on 12 May 2015, TalkTalk announced that a recent hacking attack (which resulted in the personal data of nearly 160,000 people being accessed, including phone numbers and bank details) cost the company 42m – or half of its profits. In the words of a cyber-security expert: ‘Getting their hands on all the personal and financial data involved in a tax return is a cyber-criminal's dream. Armed with an individual's banking and financial history, their employment information, date of birth, address and login details, a criminal could carry out a sophisticated identity theft. For instance, they could potentially take out a mortgage in that person's name.
In the case of the new EU public registers of beneficial ownership not only hackers, but also common criminals may gain access to sensitive information. Although the EU rules provide that access to the new registers will require the demonstration of a 'legitimate interest', a number of countries (such as the UK) have already opted for full public access, which shows the disproportionate nature of the new measures.

3. A word of warning from the European Court of Justice and data protection agencies

In the recent 'Facebook' case, the European Court of Justice (ECJ) held, inter alia, that:

  • 'legislation permitting the public authorities to have access on a generalised basis to the content of electronic communications must be regarded as compromising the essence of the fundamental right to respect for private life'
  • 'legislation not providing for any possibility for an individual to pursue legal remedies in order to have access to personal data relating to him, or to obtain the rectification or erasure of such data, does not respect the essence of the fundamental right to effective judicial protection.'
  • 'Legislation [that] authorises, on a generalised basis, storage of all the personal data (…) without any differentiation, limitation or exception (…) is not limited to what is strictly necessary [to achieve the legitimate public objective pursued]'

Unsurprisingly, therefore, a number of European data protection bodies have raised concerns about the new rules on automatic exchange of information. These include –

  • the European Data Protection Supervisor (EDPS);
  • the Article 29 Working Group (that was established under Art. 29 of the European Data Protection Directive);
  • the AEFI Group of experts appointed by the EU Commission to supervise the implementation of the EU Automatic Information Exchange Directive; and
  • the Human Rights Directorate of the Council of Europe.

In particular, the European Data Protection Supervisor lamented that 'a number of corrections should have been made (…) to better address data protection issues' and the AEFI Group warned the EU about the risks of rushing through the new rules. In the words of the independent experts 'The Council and the Member States are urged to provide an achievable implementation timetable. Consideration should be given to a phased approach to implementation. This could be achieved by pushing back reporting by 1 year, with the reporting being made in 2018 in respect of both 2016 and 2017 data. (…) The Commission, the Council and the Member States must conduct a careful analysis of legal, constitutional and data protection implications of [the new Directive] and ensure that all steps have been taken to comply with data protection rules.' (…) Ultimately, if the reporting is rushed, the quality of data that governments will be exchanging will be lacking.'

4. When politics gets in the way of policy

In a democratic society based on the rule of law, one would have expected governments to sit up and take notice of the advice proffered by data protection experts, as well as consider the implications of the ECJ's rulings. However, too much is at stake, as the seeds for the global standard of automatic information exchange were sown at the G20 London Summit of 2 April 2009, when governments were struggling to save the world from financial collapse, and the effects of indiscriminate information collection and processing had yet to be revealed by Ed Snowden in 2013 (the ECJ judgment in the Facebook case relied heavily on the effects of those revelations).

Before Snowden, and ever since 9/11, governments were singly focused on collecting information on individuals without any regard for the fundamental rights of privacy and data protection, something that came back to haunt them. For example, the UK Intelligence and Security Committee recently warned the government that 'Given the background to the draft Bill and the public concern over the allegations made by Edward Snowden in 2013, it is surprising that the protection of privacy – which is enshrined in other legislation – does not feature more prominently'.

However, recent events have made it politically unthinkable for governments to pause for breath in their campaign launched nearly seven years ago, when the world was different. The stakes appear to be too high, not least for the OECD, which ironically is comprised of unelected bureaucrats that enjoy extensive privileges, such as exemption from taxation in respect of their salaries. This, and the fact that the new rules have been pushed through by ministers (G5 and G20 leaders – see the introduction to the OECD Commentary) with little involvement from parliaments, shows that the new rules suffer from a democratic deficit.

5. When nobody listens, it's time to speak up

Unfortunately, nobody seems to be willing to raise the disproportionate nature of the rules developed by the OECD and endorsed by G20 governments. Not offshore jurisdictions, who are perceived as inherently dodgy and in many cases depend upon G20 countries. Not the banking community, which has been reeling from a loss of credibility due to a string of appalling scandals. Not even professional bodies, which appear unable or unwilling to elaborate a cohesive message around the underlying legal issues.

In the light of incessant press campaigns and revelations, people might be excused for taking a cautious approach. However, the issues raised by a system of indiscriminate exchange of information without safeguards for individuals' right to privacy goes to the heart of democracy. I am, of course, not talking about the right to privacy of tax evaders – who do not deserve it – but of the right to privacy of everybody else.

For this reason, I have written to the European Data Protection Supervisor, the Art. 29 Working Group, the AEFI Group of Experts and the Human Rights Directorate of the Council of Europe urging them to take urgent action.

6. Don't throw out the baby with the bathwater

As the fight of tax evasion is an important objective, the letter to these bodies contains proposals which would enable countries to collect their taxes in a way that would respect the fundamental right to privacy, especially in cases where confidentiality is a real concern (e.g. in countries where corruption is rife). These proposals include the implementation of final withholding tax agreements (under which financial institutions would withhold the correct amount of tax and transfer it to the relevant tax authorities), and the idea – which was first mooted by another professional – of introducing a global clearing house which would provide financial institutions with the relevant tax calculations based on data fed into a single secure system, thus by-passing direct data traffic between poorly resourced tax authorities.

In addition to reducing the intrusion into individual's private life to the minimum, the taxpayer's option to choose between information exchange and withholding tax would reduce the administrative burden for tax authorities, which under the current system of global exchange of information would have to make sense of many terabytes of complex information.  

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