Q3 2013 Feature: Offshore Trusts and the G8 Transparency Agenda
This feature looks at the implications of the G8’s call for more transparency with regard to the beneficial ownership of companies and legal arrangements for offshore trusts.
Setting the Scene
The government of the United Kingdom, which is chairing the G8 this year, chose to make transparency one of the themes of the summit which took place in Northern Ireland on June 17 and 18, 2013 along with tax and trade (the so-called “three Ts”).
Speaking ahead of the Summit, Prime Minister David Cameron said that real progress can be made in the global struggle against poverty if the "era of tax secrecy" is brought to a close. Among the changes sought from the G8 is support for lower-income developing countries to collect the tax revenues owed to them, and action against money laundering and terrorist financing regimes.
In support of these aims, Chancellor George Osborne announced ahead of the Summit that the UK would consult on tougher new rules for company ownership. Companies will be required to obtain and hold information on who rules and controls them. This information will be maintained by Companies House and made accessible to law enforcement agencies and tax authorities. Other G8 members were expected to follow the UK’s lead, and most of them have since published their own action plans for the placing of information about the beneficial owners of companies and legal arrangements on publically accessible registries.
Osborne said of the initiative: "A company should know who ultimately owns or controls it – its beneficial owners – and it is essential that law enforcement and tax authorities have access to that information. These commitments demonstrate the concrete action we are taking ourselves but it is vital that we take collective international action through the G8 to tackle the international challenges of tax evasion, money laundering and illicit finance."
The G8 Declaration on Transparency
At the conclusion of the summit, the G8 released the ten-point “Lough Erne Declaration” (named after the Northern Ireland location where the summit was held), the first point of which stated that: "Tax authorities across the world should automatically share information to fight the scourge of tax evasion." The third point also stated that “Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily.”
The G8 leaders also agreed a separate action plan which contains “principles to prevent the misuse of companies and legal arrangements.” The preamble to the plan states that the list of eight principles is “fundamental to the transparency of ownership and control of companies and legal arrangements.” It adds that:
“These core principles, consistent with the FATF (Financial Action Task Force) standards, are essential to ensure the integrity of beneficial ownership and basic company information, the timely access to such information by law enforcement for investigative purposes, as well as, where appropriate, the legitimate commercial interests of the private sector.”
It is the third principle that has direct relevance to trust arrangements, however, and this stipulates that: “Trustees of express trusts should know the beneficial ownership of the trust, including information on beneficiaries and settlors. This information should be accessible by law enforcement, tax administrations and other relevant authorities including, as appropriate, financial intelligence units.”
What Are The FATF Standards?
The Financial Action Task Force (FATF) is the global standard-setter for measures to combat the threats of money laundering and terrorist financing. It is an intergovernmental body with 36 members, and its standards, known as the FATF Recommendations, are applied by over 180 countries, through a global network of affiliated regional bodies.
The FATF Recommendations require all countries to have effective systems for preventing and addressing money laundering and terrorist financing. They set out, for example, the measures that countries should have in place within their criminal justice and regulatory systems, the preventive measures to be taken by financial institutions and professions, and measures to ensure transparency on the ownership of legal persons.
In February 2012, revised standards were adopted by the FATF. The revisions are directed towards strengthening the requirements in areas of higher risk or where implementation could be enhanced, and they aim to be clearer on transparency and tougher on corruption. They are also said to be better targeted.
It was deemed apparent that a lack of transparency about the ownership and control of legal persons and legal arrangements (trusts), or about the parties to wire transfers, makes those instruments vulnerable to misuse by criminals and terrorists. The FATF has therefore strengthened transparency requirements in these areas, and this reinforces the requirement for reliable information to be available about the beneficial ownership and control of companies, trusts, and other legal persons or legal arrangements.
Recommendation 25 deals specifically with trusts and similar legal arrangements. It states that: “Countries should take measures to prevent the misuse of legal arrangements for money laundering or terrorist financing. In particular, countries should ensure that there is adequate, accurate and timely information on express trusts, including information on the settlor, trustee and beneficiaries, that can be obtained or accessed in a timely fashion by competent authorities. Countries should consider measures to facilitate access to beneficial ownership and control information by financial institutions and DNFBPs (Designated Non-Financial Businesses and Professions) undertaking the requirements set out in Recommendations 10 and 22” (which deal with customer due diligence).
Countries and territories which are adjudged not to be meeting the standards are effectively blacklisted by the FATF, although only two jurisdictions are currently considered “high risk”: Iran and North Korea.
A further dozen jurisdictions are currently being monitored by the FATF because they are considered to have “strategic deficiencies” in their anti-money laundering codes and/or have not committed to an action plan developed with the FATF to address the deficiencies. None of these are offshore jurisdictions. They are Ecuador, Ethiopia, Indonesia, Kenya, Myanmar, Pakistan, Sao Tomé and Principe, Syria, Tanzania, Turkey, Vietnam, Yemen.
What Does All This Mean For Offshore Trusts?
In essence, not very much. At least not in the short-term. And this is mainly because most offshore territories are already meeting the standards set out both in the G8 Declaration and transparency principles, as well in the FATF Recommendations. Indeed, in many cases these jurisdictions are exceeding the current requirements, and can be said to be more transparent than the larger nations who are driving this agenda. This is largely because tax havens have been under the transparency spotlight for over a decade now, thanks to initiatives such as the Organisation for Economic Cooperation and Development’s (OECD) harmful tax campaign, whereas the rich countries haven’t.
Still, it is the world of offshore that remains the real target for tax transparency initiatives, and the British Crown Dependencies and Offshore Territories – many of which are classed as tax havens – were compelled to declare their support for the G8 transparency agenda by the UK. This they did by pledging to sign up to the Organisation for Economic Cooperation and Development (OECD) Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Developed jointly by the OECD and the Council of Europe and opened for signature by member states on January 25, 1988, the Convention is designed to help governments enforce their tax laws by creating an international framework for cooperation among countries in countering international tax avoidance and evasion. Until recently, the Convention was only open to members of the OECD and the European Union. However, it can now be signed by all jurisdictions.
In a similar vein to other leaders of government in the UK offshore territories, Orlando Smith, Premier and Minister of Finance of the British Virgin Islands (BVI), reiterated his support for the UK government’s global agenda on tax, transparency and trade upon his return to the BVI from London in June 2013. He also confirmed that the BVI would prepare national action plans on beneficial ownership to meet the FATF standards and commit to joining the Multilateral Convention.
However, to emphasise our opening point in this section, he went on to state that: “In the debate about tax and transparency the fact that the BVI already has stronger financial regulation for trust and corporate service providers, as well as rules regarding beneficial ownership than many countries in the G8 itself, has not been adequately appreciated."
He continued: “For many years we have implemented the highest international standards on transparency, accountability and information exchange on tax matters, as set out by the OECD. The BVI will continue to be a constructive partner in evolving and setting the highest standards of regulation. We are proud of our part in the global economy and we believe that good regulation is good for business. We are committed to continuing to play a leading role in delivering a responsible and effectively regulated global business environment and to tackling the global problem of tax evasion as part of a coordinated, balanced and meaningful process.”
Several other offshore jurisdictions have followed suit in a flurry of announcements issued on June 18, 2013, except using slightly more diplomatic language than Smith to stress the fact that their laws are already in line with the requirements advocated by the G8.
The Cayman Islands said that it is committed to continue working with other nations towards the full implementation of the revised FATF standards, in order to improve transparency of the ownership and control of companies in a way that ensures a level playing field across the world. This, says the Government, is a matter of good governance, as well as a means to tackle a wide range of illicit activities.
However, the collection and maintenance of beneficial ownership information by corporate service providers and trustees of express trusts has been a legal requirement in Cayman for more than a decade. The obligation on trust and corporate service providers to collect, update and retain such data is enforced through a regime that mandates a licensing process for trust and corporate service and an ongoing program of supervision and enforcement action that involves onsite regulatory inspections.
The Isle of Man Government responded to the G8 Summit by announcing the five steps it intends to take maintaining the Island’s status as a well-regulated and responsible financial centre. These include measures to:
- Co-operate with an external assessment of the Island’s compliance with all relevant international standards in the legal, financial and law enforcement sectors
- Conduct a national assessment of money laundering and terrorist financing risks
- Review its existing provisions on beneficial ownership and consider whether the introduction of a centralized registry would improve transparency of the ownership and control of companies in the Isle of Man
- Continue to play an active role in organizations which promote international cooperation to counter illicit financial flows
- Continue to negotiate and enter into international tax cooperation agreements
But as Chief Minister Eddy Teare pointed out: "Establishing the ultimate beneficial ownership behind all account relationships conducted in the Isle of Man is a legal requirement backed by on-site supervision to ensure compliance.”
“Legislation is in place to ensure that full and accurate details are maintained on the true ownership and control of every company, trust and fund in the Isle of Man, and that this information is freely available to law enforcement agencies and tax collectors,” he observed.
Nonetheless, in response to the G8 initiative the Isle of Man has further agreed to review this existing provision to determine whether a centralized registry would improve transparency of the ownership and control of companies in the Isle of Man.
Jersey Chief Minister Ian Gorst said in a statement issued on June 17, 2013, that to coincide with the G8 Summit and to share in the G8’s action to enhance transparency on beneficial ownership of companies, Jersey is publishing its own action plan.
"We are committed to implementing the revised Financial Action Task Force standards in order to improve the transparency of beneficial ownership,” he announced. “This is a matter of good governance as a means to tackle a wide range of illicit activity.”
Jersey though, already holds a central register of beneficial ownership of companies. “In addition we regulate those who form and administer companies and trusts,” Gorst added. “They are required by statute to maintain up-to-date and accurate information on the ownership of those for whom they act. All the information held in the Island is available to tax authorities and law enforcement agencies on request.”
"The International Monetary Fund (IMF) found Jersey to be fully or largely compliant with the earlier FATF standards and we are confident of a similar outcome when Jersey is next independently assessed in 2015,” the Chief Minister concluded.
Neighbouring Guernsey also published its action plan for greater transparency on beneficial ownership on June 18, and Chief Minister Peter Harwood said that this would “further strengthen the procedures we already have in place to prevent the misuse of companies and legal arrangements in Guernsey."
Pointedly, Harwood added that while Guernsey fully supports the G8 transparency agenda, “we've taken the steps that demonstrate that – not just over the last 10 weeks, but over the last 10 years and more.”
“Guernsey is part of the solution on tax transparency, not part of the problem,” he remarked.
The FATF has called upon all countries, on-shore and off, to implement the revised measures effectively in their national systems. They will then be reviewed in 2015. Given that almost all reputable offshore financial centres are already in accordance with the Recommendations, and have been shown in many respects to be more transparent than many onshore countries, it would be extreme to conclude that the G8’s renewed push for transparency will endanger the offshore trust. However, with governments still struggling to balance their books, the issue of tax avoidance is likely to remain high up the political agenda, and offshore trusts are likely to remain under the spotlight.
International Monetary Fund (IMF)
Isle of Man