Toothless treaty

THE FAMED TAX HAVEN OF SWITZERLAND seems to have finally given in to international pressure to start a process to ensure greater transparency about the accounts of foreign nationals who park their money in its banks. On May 6, Switzerland, along with 46 countries, signed the automatic exchange of information declaration of the Organisation for Economic Cooperation and Development (OECD) in Paris. The new standard of automatic information exchange is set to facilitate a seamless exchange of information on potential tax evaders and unaccounted money stashed in tax havens. The declaration comes in the context of the persistent refusal of tax havens to part with information on account holders who might be evading tax citing concerns of privacy and data protection. The declaration, which replaces a tortuous system of obtaining information on request, will allow mutual exchange of information on bank accounts and the beneficial ownership of companies and legal structures such as trusts.

The move holds significance for the developing world as information on a large amount of tax revenue illegally stashed in tax havens is now expected to be available. The then Union Finance Minister, P. Chidamabaram, hailed this development as the “efforts made by India and other OECD and G20 countries finally bearing fruit”. He also pledged to continue to pressure Switzerland to abide by its obligations under the declaration. The Swiss government avowed its commitment to dealing with the menace of tax fraud and investigation. In an official statement released after the signing of the declaration, it said, “Switzerland supports the OECD Ministers’ declaration concerning the development of a new automatic exchange of information standard in tax matters.”

Though this declaration seems to hold out hope for the developing nations, a number of sticking points are yet to be resolved. In welcoming the signing of this treaty, India focussed attention on bringing back tax revenue stashed abroad. However, there was no attendant focus on strengthening regulatory mechanisms and the legal regime to prevent money laundering. The constitution of a Special Investigation Team (SIT) is at best a knee-jerk response, which will not resolve the systemic issues that facilitate money laundering.

In an email interview to Frontline , Sol Picciotto, senior adviser to Tax Justice Network, a global network working on tax justice, highlighted some of the hurdles to ensure a seamless flow of information from tax havens: “Developing countries clearly do need to establish arrangements to manage tax information, especially systems able to handle large datasets, and a good system of taxpayer identification numbers based on international standards. This should be easier for those in richer emerging countries such as India. In my view the main obstacle is likely to be the reluctance of the elites in those countries to give this a high priority, since they know that they and their friends could be the victims. Hence, I think it is very important to develop public campaigns to make ordinary people aware of the issue and to press for implementation. Only when rich people begin to understand that information may be available to tax authorities from foreign banks will they stop hiding their money abroad and cheating on tax in their own countries.”

Former Swiss banker-turned-whistle-blower Rudolf Elmer remained largely sceptical of the declaration. In an email interview, he said: “The automatic information exchange treaty of the OECD is not as effective as many politicians make it out to be. It is only a step in the right direction and at the moment only a commitment on paper. In practical terms, it will still be difficult to exert pressure on multinational conglomerates, financial institutions and ultra-high-net-worth individuals who hide beneficial ownership details and dubious offshore transactions.”

Problems with the OECD standard

In a paper titled “OECD’s Automatic Information Exchange Standard: A watershed moment for fighting offshore tax evasion?” Tax Justice Network has highlighted some provisions of the declaration that work to the disadvantage of the developing countries. The declaration is premised on the notion of reciprocity whereby the developing nations are also required to provide information when they request information on account holders from a tax haven. This poses serious challenges to the developing countries which do not have the infrastructure to do the same.

The report states, “They [developing countries] are expected to jump through impractical and costly hoops if they want to benefit from automatic information exchange and obtain information from tax havens. Not least, they must ‘reciprocate’ by setting up complex systems to collect taxpayer information for exchange with others—even though many currently do not have the administrative capacity to do so, and almost no developing countries are tax havens.”

The standard developed by the OECD provides some escape routes for potential tax evaders through confusing semantics. The document uses the term “controlling persons” to denote persons owning structures such as trusts and secret companies. As the Tax Justice Network report notes, all beneficial owners of trusts might not necessarily be “controlling persons”, for example, when one of the owners is a minority stakeholder. This allows an escape route to some owners of a trust.

Further, under the proposed reporting standard, existing entity accounts with a balance below U.S.$250,000 need not be reviewed, identified or reported. This is loophole.

Also, there are not enough stringent measures to ensure that the banks keep a tab on unaccounted, untaxed money. The declaration merely mandates relevant financial institutions to use “reasonable effort” to determine a tax identification number and date of birth within two years of identifying a reportable account. So while the OECD standard pays lip service to due diligence checks, it does not provide a stringent mechanism to identify tax evaders. It also states that certain supposedly low-risk financial institutions can be exempted from reporting requirements. This provides considerable freedom to tax havens to conceal information about some banks.

The major tax havens have already begun to devise ways to exploit these loopholes. Sol Picciotto said, “Although Switzerland has said it accepts the standard, this is so far only on paper, it is clearly intending to be very slow in actually implementing it. The OECD’s Convention on Mutual Administrative Assistance is multilateral; automatic exchange requires a supplementary agreement, but Switzerland has said that it will only adopt these on a bilateral basis. They will be looking for assurances about protection of confidential information. They have also refused to conclude these agreements with some countries unless they agree to stop using information from whistle-blowers, which the Swiss consider to be ‘stolen’ data.”

With the Swiss government already finding ways of diluting the standard for exchange of information, this treaty will not be of much use to developing nations. Switzerland’s refusal to provide information on “stolen data” holds special relevance for India. In October last year the Indian government had placed information requests with the Swiss authorities on the basis of “stolen bank data” released by France of 700 Indian bank accounts in the Geneva-based HSBC Bank. Swiss authorities have refused to part with information on these accounts on the grounds that these requests resulted from “stolen data”. Sources said that India is likely to raise this when Switzerland comes up for its Phase 2 Review by the OECD’s Global Forum on Transparency and Exchange of Information.

Problems with India’s approach

While India signed the OECD declaration, there are a number of domestic issues that remain unaddressed. Subrat Das of the Centre for Budget Governance and Accountability highlighted some errors in the Indian government’s approach to the question of black money: “The attention in the political discourse has primarily been on bringing back black money which is stashed abroad in tax havens. This is premised on an assumption that illicit money is only parked in accounts abroad. It does not take into consideration the phenomenon of round-tripping of money in the form of investments from tax havens. Also, there needs to be more focus on preventing the generation and outflow of unaccounted money.”

Prashant Bhushan suggested a strengthening of the legal regime to prevent money laundering, “The Prevention of Money Laundering Act needs to be amended to ensure that every citizen has to disclose all assets held abroad as well as the direct and indirect shareholding in all foreign companies.”

Picciotto also pointed out the limitations of the SIT. He said, “ The effectiveness of special investigation teams I think would depend on both their access to data concerning tax evaders, some of whom might be the political and financial elite, and to whether they are able to withstand corruption.”

Earlier, in 2012, the Prevention of Money Laundering Act was amended and there was a suggestion at that time to make money laundering a criminal offence. This suggestion, however, was never implemented. In February 2012, the Financial Action Task Force (FATF), an intergovernmental body, had released a revised set of 40 recommendations to provide governments with stronger tools against financial crime. The FATF’s recommendations addressed areas of money laundering, terrorist financing, transparency and beneficial ownership of legal persons, and powers and responsibilities of competent authorities.

The recent efforts to trace unaccounted money have mostly been focussed on obtaining information about tax evaders and unaccounted wealth from tax havens. The OECD declaration has significant shortcomings and remains skewed in favour of the tax havens instead of providing concrete measures to pin down tax evaders. The refusal of Switzerland to part with information requests from India amply illustrates how the bargaining powers of developing countries have not improved even after the signing of the OECD declaration. Also, systemic issues in the Indian regulatory system have not been factored into the debate on black money.