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Confidentiality, compliance and regulation

Confidentiality

The current degree of disclosure varies between offshore finance centres.

In most of the European and onshore jurisdictions there is a requirement to publicly file details of directors, shareholders and secretary. Anonymity can therefore only be retained by using nominee shareholders and professional directors.

Jurisdictions such as Turks & Caicos Islands, British Virgin Islands and Bahamas used to require only minimal disclosure. However, most now require registers of directors and shareholders to be retained at the registered office address. Whether these are open for public inspection or not varies by jurisdiction.

In the jurisdictions that follow English common law, there is generally an implied duty for management companies, bankers, etc. to keep their clients’ affairs confidential. In some jurisdictions there may be additional local legislation that statutorily protects confidentiality and imposes criminal penalties for breaches. However, OECD, FATF, EU and US tax information exchange treaties have now eroded confidentiality to the extent that it is unrealistic to believe that it exists at all.

Know your Customer Principles/Due Diligence

Company managers and banks have adopted ‘know your customer principles’ following the worldwide introduction of money laundering legislation. These principles make it a requirement for them to know the identity of the beneficial owner, the source of monies being transferred into an account and the type of business a company will undertake. The supply of this information is a legal requirement and clients should expect to provide full and frank information about themselves, their business dealings and their future plans.

Organisation for Economic Cooperation and Development (OECD)

OECD members include most European countries, the US, Australia, New Zealand, Mexico, Czech Republic, Hungary, Poland, Japan, Slovak Republic, Turkey and Korea. Most Far East, Middle East, African and South American countries are not members but are being asked by the OECD to join with it in its exchange of information initiatives.

In May 1996 the OECD called for its members to ‘develop measures to counter the distorting effect of harmful tax competition’. Since then, OFCs have been under increasing pressure to introduce transparency and exchange of information procedures so that OECD member states can obtain the information they need to tax their citizens and residents correctly. The OECD has threatened OFCs not cooperating with these initiatives with punitive sanctions so most OFCs have made a commitment to the OECD to introduce the requested measures. OFCs that fail to make this commitment are labelled as ‘un-cooperative tax havens’ and will face sanctions from all OECD countries which will effectively put them out of business.

Tax Information Exchange Agreements

The US has signed agreements with a large number of OFCs for the exchange of information on tax matters and has stated its intention to sign similar agreements with all other OFCs before the end of 2003. The OECD’s intention is for all its members to sign exchange of information agreements with all OFCs. So soon the US will be able to obtain whatever information it requires on any structure set up within an OFC using the TEAs and may then exchange that information under the Tax Treaties it has signed with virtually all developed nations.

European Union (EU) Savings Account Directive

The EU member states have agreed in principle to introduce legislation requiring the automatic exchange of information whenever an EU resident opens an interest bearing account within the EU or in any territory under the control of an EU member. The commitment is dependent on certain other countries – most notably Switzerland and the US – agreeing to introduce similar legislation.

If this initiative does go ahead then many of the most reputable OFCs will be affected. These include Jersey, Guernsey, Gibraltar, TCI, Cayman, BVI, Isle of Man and Luxembourg. EU residents wishing to avoid automatic exchange of information would need to ensure that accounts are opened elsewhere. Obvious banking centres to use would be the Bahamas or Hong Kong.

Mutual Assistance Directives (MADs)

MADs are already in place between EU countries. These enable the tax authorities of one country to obtain information from banks in a second country via the local tax authorities.

Financial Action Taskforce (FATF)

The FATF is a sub-division of the OECD whose primary concern is the eradication of money laundering. The effect of this is higher standards of due diligence and ‘know your customer principles’. Compliance with these standards may bring additional costs and inconvenience but is an absolute requirement imposed by local and international law.

Periodically the FATF publishes a list of countries or territories which are non-compliant and labels them Non Co-operative countries or Territories (NCCTs). It asks banks and financial institutions to exercise additional caution when dealing with residents from these NCCTs. In practice this means that it is very difficult to get reputable banks to open accounts for anyone resident in an NCCT or for any entity beneficially owned by such a resident.