Isle of Man: Information Exchange: Is there an upside for Private Banking?

Last Updated: 30 September 2010
Article by Malcolm Couch

The global financial crisis came close to destroying the banking sector in key economies, and subsequently precipitated a worldwide recession. Just as it appeared that this recession was starting to unwind, serious systemic problems developed in the eurozone, which could easily trigger a 'double dip' recession.

Faced with such enormous difficulties, where the impacts are in the trillions of dollars, there has been a growing collaboration between countries and, at least to some extent, coordinated actions by them. Bodies such as the G20, OECD, and FATF have suddenly gained far greater influence and power. Pushed by the most influential and economically powerful members, such as the USA, France, Germany and the UK, enormous pressure is being brought to bear on regulation, banking and the funds sector; to name a few.

In realising that concerted action was needed at an international level and therefore pushing it hard, those same influential and economically powerful states let a genie out of a bottle. The power now rests with more broadly based bodies than has been the case in the past. Countries such as China, India, Brazil and South Africa, are very much part of the new order.

Much of the pressure in the tax co-operation field over the last two decades has been of a consistent type, and therefore strategies to deal with it could be developed based on an understanding of that consistency. Many new ideas and approaches will be seen over the coming years, however; and predicting them will be difficult. It follows that strategic planning becomes that much harder.

Starting in 2008 with insider disclosure of information related to clients of LGT Bank in Liechtenstein, we have seen the regular appearance of tax evasion stories around the world. Singled out as a particular underlying issue has been banking and jurisdictional secrecy: as opposed to legitimate client confidentiality.

While both the OECD and EU have been running partially successful campaigns against so-called harmful tax competition for over a decade, there is no doubt that the combination of tax scandals and global economic meltdown provided a massive boost to what we might call the 'anti-tax haven' lobby, and reinvigorated the organisations concerned. There now appears to be very little tolerance of the status quo ante, and a strong desire to deal with problems which have not been solved for a long time.

The rapid capitulation in the first quarter of 2009 of many financial centres under threat of sanctions if they did not dismantle banking secrecy and agree to share tax information with other countries was unprecedented. Some of them had been hoping that the challenges would go away if they kept their heads down for long enough. Others had been complacent and assumed that economic strength made them invulnerable. Both positions had to be unpicked, resulting in significant shifts in national policies by a number of governments.

In April 2009, some countries did not make it onto the OECD white list (based on implementation of the international standard on transparency and exchange of information), and their economies suffered as a result: as evidenced by the public comments of the financial services sector in the Cayman Islands. This outcome was most likely monitored by the OECD hierarchy and it must now be clear to them that threats work, and that 'naming and shaming' may cause damage as effectively as imposing sanctions.

The standard applied in drawing up the current version of the OECD lists cannot remain as it is. The goalposts will shift and this shift might not be numerical only. For example, the tax evasion and avoidance working party of the OECD tax bureau is already working on broadening concepts of information exchange to encompass automatic exchange of corporate income flows such as dividends, interest and royalties.

Also in the OECD camp, September 2009 saw a complete overhaul of the Global Forum on Taxation. It now has a formal constitution and an initial three year mandate to concentrate on transparency and exchange of information. Peer reviews have already started and are carried out in a way similar to the FATF/IMF process. These reviews will be published with the explicit aim of showing if there are any differences between form and substance in the tax standards of countries claiming to have them in place.

The EU Code of Conduct Group is reviewing again the corporate taxation systems in the three British Crown Dependencies. In addition, it has apparently been agreed that pressure ought to be put on Liechtenstein and Switzerland to bring their tax systems into conformity with the EU Code of Conduct on Business Taxation.

All of the issues which have been mentioned need to be considered before a forward strategy is put in place: either at financial centre jurisdictional level or at the level of individual business such as a private bank or fiduciary company. It needs to be remembered that at neither level is there much economic or political clout on the international stage.

Regulation of the financial services sector is vital. Countries and individual businesses must conform to the rules of the game, especially when there is a common acceptance of these rules to the extent that they can genuinely be called standards. It is not possible to opt out on the grounds of being small or unique in some other way if you want to be in the game. Is exchange of information now one of these rules? It would certainly appear so.

Financial services centres like the Isle of Man are important players in the markets. However, they are specialists: in business terms they are not in the commoditised or branded market, but in the niche services market. This niche market involves offering individually tailored and therefore highly 'valueadded' services.

It is evident that a number of the world's economies are starting to move powerfully out of recession. This means that the market for international financial services will return to growth, and that the providers of those services, whether at institutional or jurisdictional level, will, if they are positioned well, also see healthy growth.

So, assuming that countries and businesses associated with global financial services are not harbouring financial and tax crime, a key positive aspect of exchange of information can be to legitimise, and hence both protect and foster such services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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