The line between sharing relevant financial information and maintaining personal privacy is getting thinner all the time - but can it be eroded completely?
Seeing as you don"t know me personally, you probably feel that you have no right to know what I earn, where the money comes from or how I spend it. But there"s every likelihood that you think specific institutions, such as the tax department, should know and have a right to know.
Not everyone will agree that my financial details should be accessible to the government, but in the main we accept that in order to tax me, the government needs to know how much I earn.
So far, so reasonable. But, as the furore surrounding the recently released Panama Papers shows, there are a great many people who feel that international finance centres such as Guernsey and Jersey offer too much in the way of privacy.
The accusations that arise from this perception are familiar, and range from enabling the avoidance of taxation to laundering the proceeds of crime. Pressure is constantly being placed on governments around the world to make it more difficult for small jurisdictions such as the Channel Islands to keep the names of their clients secret. The result has been a raft of legislation, both internationally and locally, that is aimed at eroding this privacy.
Topping the list of well-known regulations created to give the tax office a peek under every investor"s bonnet is the US"s Foreign Account Tax Compliance Act (FATCA) regime, which was swiftly followed by the UK"s own version. FATCA and its British cousin came into force in 2013 and 2014, and require overseas financial institutions to provide details of accounts held by US and UK citizens to the relevant tax authorities.
On another front, the OECD has created the Common Reporting Standard (CRS), which enables the sharing of financial information between the countries that have signed up to it.
The CRS and FATCA are recent incarnations of rules that remove privacy from people"s financial affairs, but they are by no means the first. "Jersey has many pieces of legislation that set aside confidentiality in order to assist with investigations that meet certain criteria," says William Grace, Partner at Channel Islands-based law firm Carey Olsen.
"One of the first general modern investigative tools was the Investigation of Fraud Law in 1991. This allows Jersey"s Attorney General to require financial services businesses to disclose confidential client information in any case in which it appears to the Attorney General that there"s a suspected offence involving serious or complex fraud and there"s good reason to do so for the purpose of investigating the affairs of any person. It"s been widely used to assist the authorities of many countries for a quarter of a century."
The fact that the early laws that removed financial privacy were focused on fraud clearly suggests that the primary concern surrounding confidentiality, whether in the UK or abroad, was its ability to conceal illegality from the authorities.
The linking of financial privacy to illegality was always bound to have repercussions for international finance centres such as the Channel Islands and certainly, looking back, this was for good reason. One of the first pieces of information to emerge from the Panama Papers was a role played by a Jersey company in laundering the proceeds of the Brink"s-Mat bullion heist in 1983.
Juggling act
Today, such a history can cause problems for those charged with ensuring the islands not only enforce international regulations, but are seen to be doing so and, on top of that, are appreciated for it. The latter is not so easy to achieve, as international media have a tendency to conflate the secrecy of one "tax paradise" island with the privacy afforded clients in a financial centre that also happens to be an island.
"There are certain people for whom an offshore jurisdiction will always bring up images of shady deals, but they are people who aren"t up to date with the changes that have been made," says Emma-Jane Weider, Partner at London-based law firm, Maurice Turnor Gardner.
Those changes include non-public registers of beneficial interests and a raft of tax information exchange agreements (TIEAs) that ensure both Jersey and Guernsey are linked into governments around the world. The agreements mean that the islands are able to provide information on the financial affairs of foreign citizens to their respective governments when a request is made.
This sounds very reasonable, but sharing information with other jurisdictions doesn"t come without risks. "It"s possible that there will be some jurisdictions with which Jersey and Guernsey will exchange information, where the information may not be kept confidential," says Wendy Martin, Partner at EY in the Channel Islands. "However, governments, including ours in the Channel Islands, should satisfy themselves that the receiving authorities implement appropriate safeguards."
In the UK, HMRC has allegedly been the source of a number of leaks of financial information. Given the relative high-regard in which the UK government is held worldwide, if its own tax department is unable to guarantee confidentiality, then it"s hard to imagine that all of the other countries with which the Channel Islands have signed TIEAs (Guernsey 60 and Jersey 36) will be any more careful with the data they hand over.
"There are lots of legitimate reasons for using offshore structures," says Martin. "One example would be someone who"s managing family wealth and doesn"t want their children to know about the wealth until they can legitimately use it."
Weider agrees, adding that there are some fundamental reasons for privacy. "Some people come from places where the environment for wealthy people can be quite frightening. Not all of the reasons for privacy are sinister," she says.
The high-level and compliant nature of the islands" regulatory regimes is regularly held up as a reason to use their financial services capabilities. Both Jersey and Guernsey are ranked alongside the UK as being "largely compliant" in the OECD"s Tax Transparency 2015 report and there"s no question that the islands want to promote transparency and legitimacy rather than take on questionable business.
"Jersey doesn"t allow confidentiality to be used as a cloak for wrong-doing. If the client believes otherwise, then they are badly mistaken," says Grace.
Illegitimate business is unwelcome - the islands are clear about that. But in the race to be seen as transparent, is there a possibility that potential clients with totally legal sources of wealth might avoid the Channel Islands because of a lack of privacy?
The answer, according to Martin, is clear - the advantages of compliance and cooperation outweigh the possibility of losing business. "I think there"s a minor risk of losing business. Those people who are concerned about their privacy are more likely to have something to hide. I don"t think this new world of transparency is going to adversely affect us," she says.
While many people are likely to agree with this assessment, there"s an element of "if you"ve done nothing wrong then you"ve got nothing to hide", which seems to ride roughshod over the idea that privacy is a human rights issue. This is something that the law firm at the heart of the Panama Papers scandal, Mossack Fonseca, has used in its defence. In a public statement, it said: "Privacy is a sacred human right that is being eroded more and more in the modern world. Each person has the right to privacy, whether they are a king or a beggar."
Weider has concerns that tax authorities requesting information may not always have the clearest motives, but she accepts that times have changed. "With some of the information, you wonder what it"s going to be used for by the tax authorities. But people have to get used to a new reality," she says.
And reality is all that really matters in the world of finance. The high level of privacy that was once second nature to the industry is being lowered. All staff in an institution are now expected to report anything suspicious. Increasing numbers of governments are sharing information quickly and easily. The public is demanding to know more.
change of emphasis
None of this is going to go away, and those who feel they need the services of jurisdictions such as Guernsey and Jersey should make sure they are aware of it, because today a bank is going to turn away business if the client doesn"t reach certain standards.
"In the modern era of legislative tools piercing confidentiality, clients must behave to a higher standard, both substantively and in the manner of their dealings with the businesses managing assets for them," says Grace. "Financial services businesses are selective about whom they take on as clients, so that they can manage the risks that go with each client engagement. Clients must understand this dynamic and act appropriately."
Businesses in the Channel Islands are in a position where they must pick and choose who they do business with, and the cost to clients for being chosen is an acceptance that their privacy can never be guaranteed. Privacy may be a human right, but its level is negotiable and, right now, there are forces around the world that are negotiating that level down.