Leaks on tap
Making tax-transparency standards watertight will be difficult
THE optimistic view of the tax-evasion scandals that have bedevilled banks since 2008 is that they can only be seen in the rear-view mirror. The incriminating files in the latest case, regarding tax-dodging personal accounts held at the Swiss arm of HSBC, date from 2005-07. Since then governments have embraced the idea of exchanging tax information on an automatic basis. The emerging global standard—the OECD’s Common Reporting Standard (CRS)—sounds the death knell for bank secrecy, or so campaigners hope.
The optimists are right, up to a point. A tax-transparency revolution is under way, catalysed by America’s Foreign Account Tax Compliance Act of 2010. But wherever there is a financial crackdown, there are also enterprising moneymen looking to exploit remaining loopholes or to create new ones. One way they are doing this is by cloaking bank accounts in other financial products, such as insurance and pensions.
Some insurers have approached banks, offering to “wrap” batches of undeclared accounts and investments in such insurance, thereby providing an extra layer of protection from prying eyes. As a result, America, Italy and others have been investigating products like “private placement life insurance”, which combines an investment portfolio with gold-plated life cover for rich clients.
As scrutiny increases and the CRS moves closer to reality—implementation is set to begin in 2016—these workarounds are evolving. Under the new standard, insurance wrappers will have to be reported if they have a “cash value” to the holder (if, say, he can withdraw funds from the policy or pledge it as collateral). So financial engineers have turned their attention to a version that does not have to be disclosed: “irrevocable” life insurance.
This works as follows. The client pays a premium to a newly created offshore company. The assets are legally owned not by the client but by the company. This in turn is owned by the insurer, which extracts quarterly fees. The client cannot take cash out directly or use the policy as security, so it has no cash value. But he can enjoy its fruits since he can have full use of any yacht, house or other asset bought by the company. He can even be the portfolio’s investment manager. If investigators start snooping around, they will find a company that is owned by a licensed insurer, not a tax-evading plutocrat.
The world’s largest insurers are unlikely to hawk such products, given the reputational risks. Smaller, offshore providers will be more tempted. A consultant says he knows of at least two such insurers that have recently approached banks, offering to wrap batches of tax-dodging accounts. One of them was only interested in doing bundles of $1 billion or more, he says, suggesting this is “potentially very big”.
Closing this loophole would require making all insurance reportable, not just policies with a cash value. That might seem straightforward, but moving the CRS forward can be like herding cats: there are 93 countries in the project, all at different stages of ratifying the existing blueprint.
The OECD hopes that upright financial firms will turn in rivals that abet tax evasion once the CRS kicks in, if only to stop them stealing business. Tax campaigners are another source of intelligence. A report published last year by the Tax Justice Network, whose membership includes smart tax lawyers with a conscience (supply your own punchline), identified more than 30 loopholes and exemptions in the CRS.
Andres Knobel, one of those lawyers, also points out that even if the loopholes in the CRS are fixed, it won’t end all bank secrecy, but only the tax-related bit of it. Much money is parked offshore not to evade tax but to hide the proceeds of corruption or to launder criminal money. If the information is not important for tax purposes, either because the corrupt official or launderer paid taxes and declared the foreign income, or because his deposit abroad does not generate any income and thus there is no tax to pay, then under the CRS it shouldn’t be shared with any authority not related to tax issues—even if this other authority questions the origin of the funds. The failure to agree to use the mountains of soon-to-be-reported data to tackle the blackest money is the biggest loophole of all.
