Student blog post: Common Reporting Standards – Criminal Information Nowhere to Hide?

Posted on

This post (edited for publication) is contributed to our blog as an excerpt from an LLM Dissertation by Yen Lai. Views expressed in this blog post are those of the author only who consents to the publication.

Our financial world today remains as a black hole whereby the illicit capital flow or unreported assets of financial criminals are utterly difficult to gauge on its extent, especially in the tax haven. The real magnitude of criminal use of tax haven is always uncertain, because of its bank secrecy facilitates criminal activities like tax evasion, money laundering and conceal the illicit money trail related to other white collar crimes.  The tax scandals such as Panama Paper and Paradise Paper could be tip of the iceberg. The aftermath revealed the inefficiency of authorities when tax information is needed to be “leaked” by financial firms because it is extremely hard to keep track on the money trail with intention to hide over the world.

Currently, the most extensive feature of the Common Reporting Standard by OECD consists of a model of Multilateral Competent Authorities Agreement that allows information to be exchange automatically after a jurisdiction signs into it. This Automatic Exchange of Information is particularly useful in transmitting information such as the money flow between jurisdictions, the changes of residence, the purchase or disposition of property, value-added tax refunded, etc.  This will provide timely information on non-compliance where tax has been evaded. However, there is a foreseeable problem of too much or too little information being exchanged between jurisdiction and how the investigators process and utilise the data will be highly concerned.

Firstly, the US as one of the major economy and ranked as second most secrecy jurisdiction, is not a signatory to CRS, but adopted own FATCA. There will be too many bilateral or multilateral Competent Authority Agreements (CAAs) become available to facilitate the automatic exchange of information within the CRS.  The matter of cost and efficiency arise with the problem of too much information.  Secondly, there is lack of provision to demand a jurisdiction to sign a CAA with another jurisdiction, even if the latter complies with confidentiality and data protection safeguards.  A secrecy jurisdiction can be a signatory to CRS, upholding its reputation, by choosing another secrecy jurisdictions or major financial centres to exchange information.  Thirdly, there is incompleteness in the non-reciprocity mechanism for developing countries as there is no provision of a timeframe on when a full reciprocity would be required.  Fourthly, it is a big obstacle to require a consensus from the jurisdictions that have signed the CRS before accepting a new jurisdiction.  It indicates a risk of secrecy jurisdiction acts on self-interest purpose.  Fifthly, non-reciprocity is offered to jurisdictions without an income tax, which means secrecy jurisdictions can send information but not receiving information from another jurisdiction.  This can promote the status quo and corruption of a secrecy jurisdiction because the prosecution of financial criminals will be hard without the information on its residents’ foreign income from another jurisdiction.

It is perceptible that CRS is a voluntary scheme that mainly depends on a jurisdiction to fulfil its commitment through their national legislation. The UK has passed numerous legislation in tackling tax evasion while complying the CRS. The problem with the UK legislation is that it is too hard to prosecute a company for the facilitation of tax evasion by their customers or suppliers.  Moreover, the Big Four accounting firms involved in numerous scandals outbreak show a growing consensus in facilitating the wrongdoing of their clients.  Hence, Criminal Finances Act 2017 has significant reform that introduces two offences to held account for ‘fail to prevent’ the facilitation of UK tax evasion and far-reaching to the evasion of foreign tax that was assisted by any firms incorporated in the UK; rather than trying to attribute the criminal acts in proving the “directing mind” of the firm.  The new offences come with greater powers for law enforcement to regulate the risk profile of financial sector and professional services firms in relation to tax evasion issues and their compliance programmes.  Other than that, the UK lawmakers passed several regulations in complying the CRS, such as extending the Data-gathering Powers Regulations 2016, International Tax Compliance Regulations 2015 and the Client Notification Regulations 2016.

In conclusion, CRS does not aim to change a secrecy jurisdiction’s fiscal policies but merely to eliminate the secrecy through exchange of information. Positive movement can be seen in the increasing number of jurisdictions that have signed up to the CRS, compliment by the progress in the law-making of each jurisdiction. CRS’s automatic exchange of information demonstrates a transparency improvement and certainly better than previous exchange information on request. Notably, the CRS will not be a succession until all jurisdictions implement it, as of the nature of tax evasion and facilitation of tax haven involve uncountable complexity network.

Bibliography

Primary source:

Statutes and statutory instruments:

Criminal Finances Act 2017, ss 45-46

Data-gathering Powers (Relevant Data) (Amendment) Regulations 2016, SI 2016/979

Foreign Account Tax Compliance Act (2010) 26 USC § 6038D; 26 USC §§ 1471-1474

International Tax Compliance (Client Notification) Regulations 2016, SI 2016/899

International Tax Compliance Regulations 2015, SI 2015/878

Secondary source:

Reports:

European Parliament, ‘Organised Crime, Corruption, And Money Laundering: Recommendations on Action and Initiatives to Be Taken’ (CRIM Special Committee 2013)

Knobel A and Meinzer M, ‘Automatic Exchange Of Information: An Opportunity For Developing Countries To Tackle Tax Evasion And Corruption’ (Tax Justice Network 2014)

Knobel A and Meinzer M, ‘”The End Of Bank Secrecy”? Bridging The Gap To Effective Automatic Information Exchange’ (Tax Justice Network 2014)

OECD, ‘Standard For Automatic Exchange Of Financial Information In Tax Matters: Implementation Handbook’ (OECD Publishing 2017)

Mitchen A and Sikka P, ‘Tax Dodging Is Their Business’, The Pin-Stripe Mafia: How Accountancy Firms Destroy Societies (Association for Accountancy & Business Affairs 2011)

Teka R and Donaldson R, ‘Corporate Liability For Economic Crime: Submission From Transparency International UK’ (Transparency International UK 2017)

 

Journal articles:

Ambrosanio M and Caroppo M, ‘Eliminating Harmful Tax Practices In Tax Havens: Defensive Measures By Major EU Countries And Tax Haven Reforms’ (2004) 53 Canadian Tax Journal 685

LeVine R, Schumacher A and Zhou S, ‘FATCA And The Common Reporting Standard: A Comparison’ [2016] Journal of International Taxation

van Duyne P, ‘Money-Laundering: Pavlov’s Dog And Beyond’ (1998) 37 The Howard Journal of Criminal Justice 359

Websites:

Christensen J, ‘Panama: The Making Of A Tax Haven And Rogue State – Tax Justice Network’ (Tax Justice Network, 2016) <http://www.taxjustice.net/2016/03/30/panama-the-making-of-a-tax-haven-and-rogue-state/> accessed 4 September 2017

Fitzgibbon W, ‘EU Encouraged To Name European States In Tax Haven ‘Blacklist’ – ICIJ’ (ICIJ, 2017) <https://www.icij.org/investigations/paradise-papers/eu-encouraged-name-european-states-tax-haven-blacklist/> accessed 4 December 2017

Fowler N, ‘The OECD Information Exchange ‘Dating Game’ – Tax Justice Network’ (Tax Justice Network, 2016) <https://www.taxjustice.net/2016/10/25/oecd-information-exchange-dating-game/> accessed 1 November 2017

Martin N, ‘The Common Reporting Standard: Are You Ready?’ (PwC, 2016) <https://www.pwc.co.uk/who-we-are/regional-sites/london/insights/the-common-reporting-standard-are-you-ready.html> accessed 10 February 2018