Transparency v privacy

Written by: Chris Wheal Posted: 17/02/2020

Offshore illoA greater push for transparency in offshore structures is a good thing for blue-ribbon jurisdictions such as Jersey and Guernsey, experts say, but its contradiction with privacy laws will need to be ironed out

Perceptions pose problems. Publication, in 2016, of the Panama Papers gave a fillip to the preconception that offshore structures were secret havens for criminals and tax evaders. Demand rose for increasing transparency. But do those demands go too far?

Plenty of action on anti-money laundering (AML) and countering the financing of terrorism (CFT) had already happened. Inter-governmental body the Financial Action Task Force (FATF) was established in 1989, the FATF Recommendations were published in Paris in 2012, and there were UN resolutions in 2014 and 2015. The US introduced the Foreign Account Tax Compliance Act (FATCA) in 2010.

Many jurisdictions, including the Channel Islands, had significantly upped their controls. But the Panama Papers accelerated calls for change, almost prompting Theresa May’s government to legislate over the Crown Dependencies. 

Even avoiding that constitutional crisis, the use of common reporting standards and the introduction of the UK’s Trust Register – potentially affecting certain offshore activities – have created work for Channel Islands investment experts.

It’s easy to see why. Within a couple of years of the Panama Papers being published, governments around the world collected more than $1.2bn in additional taxation. The public perception – shared by politicians – was that all offshore jurisdictions were the same: secret stashes of unaccounted cash could be concealed there, so urgent action was needed.

Within the European Union (EU), the fourth and fifth AML Directives have seen parliamentarians get increasingly tough, seemingly prepared to throw privacy under a bus as they drive through draconian rules.

The 5AMLD sets out a series of implementation dates (see box), between which there will be significant legal case work that may help set the boundaries. Within the EU, conflicting with the 5AMLD provision to publish and be damned, sits privacy and data protection legislation, particularly the onerous and restrictive General Data Protection Regulation (GDPR) regime.

Key conflict 

Stephen Ozanne, Senior Counsel at Walkers Global, pinpoints a key conflict. Paragraph 30 of the 5AMLD begins: ‘Public access to beneficial ownership information allows greater scrutiny of information by civil society, including by the press or civil society organisations.’

It ends: ‘Access to that information would also help investigations on money laundering, associated predicate offences and terrorist financing.’ The primary purpose for publication appears to be to help the press and campaigners dig dirt on the rich and famous, with AML/CFT an afterthought.

Actor Emma Watson, who played Hermione Granger in the Harry Potter films, was named in the Panama Papers. She stated publicly that she only used offshore structures to protect her privacy, not for tax avoidance.

Online publication of beneficial owners could subject celebrities to harassment and stalking, and put individuals at risk of kidnap, extortion or protesters intruding their homes.

Individuals are set to launch legal action, arguing that their right to protection under privacy laws and GDPR overrides any legislation that demands publication so that newspapers can publish stories or politically motivated campaigners can target individuals.

But concerns run deeper, even around cross-border sharing of data between law enforcement, tax and regulatory authorities. The Bulgarian tax office was hacked in July 2019 and the records of five million taxpayers stolen – might the automatic sharing of registers of beneficial ownership make all that data available to a hacker entering via the weakest point in the network?

The Crown Dependencies took the unusual step in 2019 of issuing a joint statement. They have committed to mirroring the EU’s final implementation of 5AMLD and online publication of registers of beneficial ownership.

But – crucially – they will delay defining exactly where and how they will publish beneficial ownership data until after the EU has carried out its own review of implementation in January 2022.

“Our timetable is designed to allow us to see how all the EU states are going to deal with the conflict between GDPR and 5AMLD,” says Ian Rumens, Global Head of Private Wealth at Intertrust in Jersey. “That’s how I’ve interpreted it, and I think it’s clever.”

Ahead of the curve

The Channel Islands are not being dragged kicking and screaming into a new compliance regime. In many cases, they are ahead of the curve, with more rigorous regimes than mainland UK. Registers in Jersey and Guernsey are all verified, with regulated firms having to comply with strict AML identity checks before registering beneficial owner details.

In mainland UK, by contrast, Companies House records are notoriously error-strewn, and with no verification process in place. 

However, a Companies House spokesperson told BL: “The government has recently consulted on a range of reforms that will, when implemented, improve corporate transparency and provide Companies House with powers to verify information or where necessary to query the information provided.”

In a blog on the Companies House website, published when the consultation was launched in June 2019, Louise Smyth, Chief Executive and Registrar of Companies, acknowledged that Companies House had faced problems related to accuracy of information held, abuse of personal information on the register and misuse of UK-registered entities as vehicles for economic and other crime.

Yet it remains offshore financial centres that have the reputation as safe havens for criminals. Oliver de la Fosse, Senior Corporate Finance Manager at Oak in Guernsey, says that reputation has not been fair for decades.

“But I do think we do our credibility more damage by not acknowledging the fact that Guernsey, like other places, was sometimes used for activities that just wouldn’t be accepted now. But that’s long gone. For the last 20, 30 years, nothing could be further from the truth.

"For my generation, ‘millennials’ born after 1980, all we’ve known is Guernsey as the exemplar international financial centre. There are few, if any, places in the world with a tighter grip on beneficial ownership.”

With verified and accurate registers, the concern in the Channel Islands is about the publication of information currently held privately. “Privacy is an important factor,” says David Dorgan, Private Client and Trust Partner with Appleby.

“Jersey has had a register of ultimate beneficial ownership since 1989. Some investors won’t care that it’s published, but some will. They need privacy for their protection.” 

Privacy, not secrecy

His colleague in Guernsey, Dispute Resolution Partner Richard Field, says privacy and secrecy are very different. 

Any legitimate request from tax authorities, law enforcement agencies and financial services regulators will be met with full disclosure. Those who need access have access through the correct channels. “The Crown Dependencies are about upholding privacy, not secrecy,” he says.

Amy Collins, Client Director at Ocorian, says: “Where legitimate confidentiality is a driver, it’s not authorities that cause concern but the public, the criminal element and, in some circumstances, overzealous media.”

Ozanne at Walkers warns: “The more assets you have, the more you are a target. You will be in the crosshairs of gangs who want to extract something from you. 

“In the modern world of the internet, giving people easier access to the kind of information they can use against you in the digital space, or physically, heightens that risk further.”

Field hopes the wait-and-see approach will result in an EU nation developing a compromise that meets the requirements laid down by 5AMLD but without full publication online – a beefed-up exception regime, perhaps, or abridged publication. 

The standard will need to be consistent, he says, to avoid money moving to the least compliant regime. “If there are some EU differences, then you do risk jurisdictional arbitrage,” he says. Ozanne raises the spectre of a sixth AMLD designed to tidy up the discrepancies.

Preparing for the inevitable

Rumens believes the financial services sector must prepare for the inevitable. “The direction of travel in the financial services industry is towards open transparency,” he says. “It’s a good thing for blue-ribbon jurisdictions like Jersey and Guernsey. We are going to see a flight to quality.”

He believes that, on publication, the best clients will not want to be seen having offshore structures and companies in regimes considered ‘less desirable’ and will choose to move or reorganise their affairs to the offshore centres with the highest standards.

“The higher up the ranking you are in the OECD and international finance rankings, the easier it will be to attract clients,” he says.

That could mean a busy time as the deadline for online publication gets closer. “The big challenge is educating clients,” adds Rumens. “They will have historically seen the transparency issues as only relating to offshore centres. But it’s not only an offshore, midshore or onshore issue.

"Open transparency is going to be everywhere. What clients don’t want is to start paying extra for it. They want the structures we offer to comply with all the legislation, regulation, taxation and law enforcement, without it costing them.”

Oak’s de la Fosse agrees. “Our only viable future lies in maintaining the bailiwick at the very top echelon of international finance. Our competitive advantage isn’t secrecy and shadows – if you want these things, you are not welcome here. In 2020, Guernsey is about transparency, professionalism, discretion and expertise.”

Collins believes that clients are savvy to the new rules. “A number are now collating information packs ready to be shared quickly with institutions that require it,” she observes.

And there will be more change to come as digitisation increases. Rumens cites blockchain and improved security enhancements, while de la Fosse says the younger generations will expect to manage their affairs on their phones using apps.

For the vast majority of clients, these service issues may well become more important than the argument between transparency and privacy, they claim. It will be the perception of quality that prevails.

Offshore box illoEU Fifth Anti-Money Laundering Directive: Key implementation dates

10 January 2020 Article 30 – Registers of beneficial ownership for corporate and legal entities                         
10 March 2020 Article 31 – Registers of beneficial ownership for trust arrangements                                           
10 September 2020 Article 32a – Centralised automated mechanisms to enable identification of who owns or controls accounts                                  
10 March 2021 Article 30-31 – Interconnection of registers


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