Just under ten years ago, the reputation of the offshore finance sector was not in a good place. In 2012, a headline in the UK national newspaper The Guardian read ‘£13tn hoard hidden from taxman by global elite’. The article cites a report, The price of offshore revisited, by James S Henry, senior adviser and global board member of the Tax Justice Network, which “shows that at least £13tn – perhaps up to £20tn – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high-net-worth (HNW) individuals”.
Subsequent high-profile scandals, such as Swiss Leaks in 2015, which saw an employee of HSBC Private Bank in Switzerland steal and disclose to authorities data revealing its involvement in widespread tax evasion; and the ‘Panama Papers’ in 2016, which exposed a range of financial institutions from around the world for their involvement in tax evasion and money laundering, undoubtedly did further reputational damage.
But it’s fair to say that overly simplistic views on the use of offshore jurisdictions based on some of these high-profile events are now outdated. Banking secrecy is essentially a thing of the past in Switzerland, and the EU removed the Cayman Islands from its list of non-cooperative tax jurisdictions in October 2020, after it implemented reforms. International cooperation between governments is on the rise, and offshore jurisdictions are increasingly being used for far more than tax planning.
Cooperation and enforcement ramps up
A key development along the path to increased international cooperation on tax evasion was the Organisation for Economic Co-operation and Development’s (OECD’s) Towards global tax cooperation report, published in 2000. It identifies over 30 ‘tax havens’, the starting point of this definition being “a jurisdiction which has no or nominal taxation on financial or other service income and offers or is perceived to offer itself as a place where non-residents can escape tax in their country of residence”. This was not intended to ostracise these jurisdictions, but to identify those that needed to change their practices, with a view to producing a ‘list of uncooperative tax havens’ by July 2001.
All but Andorra, Liechtenstein, Liberia, Monaco, the Marshall Islands, Nauru and Vanuatu had made formal commitments to implement the OECD’s standards of transparency and exchange of information by April 2002. Those seven were identified as uncooperative tax havens but, by May 2009, all had made the required commitments and had been removed from the list.
Rather than the original listing system, today the OECD manages the Global Forum on Transparency and Exchange of Information for Tax Purposes, which has 162 jurisdictions as members and is the leading body working on the implementation of transparency and exchange of information standards around the world.
The OECD also has a Common Reporting Standard (CRS), approved in 2014, which calls on jurisdictions to obtain information from their financial institutions and automatically exchange this with other jurisdictions. As of December 2020, more than 100 jurisdictions are committed to the CRS.
Another significant development has been the US Foreign Account Tax Compliance Act (FATCA), endorsed in 2010, which requires financial institutions foreign to the US to report on the assets held by their US account holders. The US Department of the Treasury lists 113 jurisdictions as having FATCA agreements and understandings in effect.
The EU operates a listing system – the EU list of non-cooperative tax jurisdictions, which was introduced in December 2017. The EU screens countries on their tax transparency, fair taxation practices, and implementation of OECD tax avoidance measures. As at February 2021, 12 jurisdictions that have refused to engage with the EU or address tax governance shortcomings are listed, while a further nine are on a ‘watch’ list.
"The wealthy ... are creating passport portfolios, ensuring they have access to second citizenships or residences"
Nick Reeves CFP™ Chartered MCSI, director and head of wealth planning and intermediary engagement at Deutsche Bank – International Private Bank, says that the implications of both local and international developments have resulted in increased due diligence requirements for banks. He says that Deutsche Bank runs a risk system that requires a detailed understanding of clients’ affairs to make sure no tax evasion or other crimes have taken place, including identifying the source of client wealth, the country in which the wealth was made, the industry in which it was made, and the legal structures used.
Breaches of due diligence requirements by banks are also now being heavily punished by regulators. In its April 2021 report, Up close and personal, the year of personal accountability – a global research report on financial institution fines and enforcement actions, Fenergo, a company that specialises in the provision of digital compliance and regulatory technology for financial services firms, finds that fines for non-compliance with anti-money laundering and know-your-customer legislation totalled US$10.4bn in 2020, up from US$5.7bn in 2019, and US$3.2bn in 2018.
According to Nick, the combined effect of these changes has resulted in a different approach to the use of offshore jurisdictions. Whereas previously, some may have attracted clients solely because of their secrecy practices, which could have facilitated tax evasion, today they attract clients through attractive but transparent tax structures, and specialist services and expertise, with different offshore centres tending to focus on one or a few specialist areas.
But David Lesperance, founder and principal of international tax and immigration advisory firm Lesperance & Associates, and co-author of the 2015 book Flight of the golden geese: how the 1% matter to the 99%, emphasises a trend that was firmly in place pre-pandemic, but which has now accelerated: the wealthy are making increasing use of a growing number of offshore jurisdictions for not only their wealth, but also their wellbeing. He says: “The wealthy, even those in the most developed markets, are creating passport portfolios, ensuring they have access to second citizenships or residences, and are even creating ‘back up plans’ – comprehensive citizenship, residence and domicile solutions that address potential economic, political, societal and environmental changes that could impact their wealth and their security.”
Increasing offshore activity
In Flight of the golden geese, David and his co-author Ian Angell, Professor Emeritus at the London School of Economics, highlight tax policies and an increasing tendency for some governments to demonise the wealthy as the main drivers of this movement towards offshore: “Whether or not they realise it, some governments are actually driving the Golden Geese away, whereas others are actively attracting them with a soft landing”, they write.
David says several forces are accelerating this trend. He notes that some of his US clients are concerned about the possibility of wealth taxes under a Biden presidency, while clients in the UK are worrying about post-Brexit Britain. In addition, he has “clients from all over worrying about the future of currencies – this could be a concern about their home currency devaluing in the traditional sense, or the implications of cryptocurrencies”.
Wealthy individuals in developing markets, such as Africa, often use offshore jurisdictions for wealth preservation and transfer, not necessarily for wealth creation, says Idowu Thompson MCSI, group head of private banking at First Bank of Nigeria, who provides a personal perspective on the use of jurisdictions, based on over a decade of wealth management experience. “HNW individuals in Africa would typically seek the tax benefits of holding assets in offshore jurisdictions, but for many Africans, offshore jurisdictions are used to hedge against high inflation rates (which tend towards double digits in some African countries), and the depreciation in the value of their local currencies, hence impacting their wealth preservation efforts.”
Jurisdictions in vogue
Zurich-based Marnin Michaels, partner – tax/wealth management at law firm Baker McKenzie, provides some historical context to how Switzerland has remained such a dominant force in offshore banking: “What Switzerland has managed to do, time and again, is reinvent itself so that its offering remains attractive.” He points out that Switzerland was a prominent banking centre long before its banking secrecy laws were enacted in 1934, so it is incorrect to say that secrecy has been the main foundation upon which Switzerland’s banking system has been built.
"Historically, and still today, two of the key reasons people have banked in Switzerland is because it is stable and secure"
Euromoney’s Global Private Banking and Wealth Management Survey ranks three Swiss banks in the top five of the category Best Private Banking Services Overall 2021 (globally), with UBS ranking first; and two Swiss firms in the top four of the Technology – Innovative or Emerging Technology Adoption 2021 category (globally), which is again headed by UBS. According to the Swiss Bankers Association, Swiss banks account for about one-quarter of global assets managed cross-border.
Today, the primary law governing bank secrecy in Switzerland is Article 47 of the Swiss Federal Act on Banks and Savings Banks (amended 2016), which requires Swiss banks to respect the confidentiality of customer data. But several exemptions exist, including allowing for the disclosure of bank customer data to comply with agreements Switzerland has entered into with other countries to address tax fraud and tax evasion. Most prominently, Switzerland agreed to cooperate with the US following extensive US action against Swiss banks in the wake of the global financial crisis.
Marnin summarises: “Historically, and still today, two of the key reasons people have banked in Switzerland is because it is stable and secure. But then you have the other differentiators too. Low tax rates, yes, and for some in the past, secrecy.
“But today, it is a centre for people with extensive international affairs who want access to the financial system in a way that other financial centres can’t provide. For example, if you want to bank in five different currencies and access 50 different capital markets, the Swiss can do it fairly easily. It’s either not possible or more difficult in other financial centres.”
Ian Angell, who says that many governments’ actions are alienating the wealthy and driving them offshore, thinks the landscape of jurisdictions will continue to change. While he expects even more bifurcation between ‘anti-wealthy’ countries and ‘wealthy-friendly’ countries – with policies designed to attract the wealthy, their families, assets, and perhaps their businesses too – he sees developments going beyond that.
As far back as 1998, Ian suggested that the future of money might involve ‘off-planet banking’, which could involve sending digital money in a digital safe into space. Today, the concepts of digital money and digital safes are nothing unusual and make his 1998 views border on the prophetic, even though technological advancements have probably rendered the idea of sending digital safes into space unnecessary. Ian has updated his thinking given the development of technologies such as cloud computing and cryptocurrencies. He says, “I can see a situation where a private ‘club’ of wealthy individuals would transact with each other in their own private currency, outside of the visibility of governments and using private blockchain technology.”
Ian also envisages a situation where these clubs negotiate with governments to have the ability to issue passports to their members, with the associated rights of travel and perhaps even residency. He suggests the first movers might be today’s technology giants, such as Amazon or Apple.
Ian’s projections are unconventional possibilities of the future. But combine them with some of the latest uses of offshore jurisdictions – access to specialist financial skills; alternative citizenship, residency and travel solutions; protection from currency and inflation effects; and access to medical treatments – and the more ‘traditional’ use, tax planning, and it is clear that the use of offshore jurisdictions is likely to play an increasing role for many in both wealth and wellbeing planning.
The full article was originally published in the June 2021 edition of The Review.
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