Friday, October 01, 2010

OECD: peer reviews and pitfalls

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes , the OECD’s younger brother which was launched in 2000 to include non-OECD tax havens in the work of the OECD has just published its first round of assessments on 8 jurisdictions, namely Bermuda, Botswana, Cayman Islands, India, Jamaica, Monaco, Panama, Qatar. We haven’t had time to review this in great detail yet, but here are a few preliminary thoughts pointing to things we have noticed so far (and any comments, as always, are welcome.)


Generally, the OECD and the Global Forum’s transparency publications are tinted by a view that the market is the best arbiter of societal relationships. This attitude seems to spill over in the very standards of information exchange the OECD promotes, sometimes in startling ways. Bermuda seems to be implementing the process by asking for money in return of information exchanged on suspected tax evaders! On page 52 of the report on Bermuda, in its section on information exchange, it says:
"The competent authority may decline a request where:
i) Section 4(1): the requesting party does not agree to pay the costs of providing the assistance, whether incurred by the Minister or any other person; [...]"

It almost seems as if trust companies, lawyers, and company service providers have found a new line of business in Bermuda, cashing in on fees from the requesting foreign governments! Justice carries a cost, of course, but how much exactly does the Global Forum suggest in these cases?
While it is too early to provide a full assessment of the quality and usefulness of the peer reviews, some initial comments and impressions are warranted.

It is hard to see what value these peer reviews are adding, when compared to the Tax Co-operation reports published annually by the Global Forum since 2006. Those reports contained densely compressed information in tables, and a quick check on the new peer reviews on Bermuda and the Cayman Islands suggests that little factual new evidence is collected. The exceptions in the new peer reviews involve a) the general provision of more background information on legal arrangements (trusts), b) the novel provision of the legal source for many factual claims contained in the old reports, and c) new analyses on the question of how and whether non-compliance with statutory provisions is penalised.

Apart from this, a lot of text has been added, embedding the factual information, but this makes it harder to compare the different jurisdictions -- not to mention the enormous cost for the additional bureaucracy, such as peer review staff, travel cost, etc. In the case of Bermuda, on the question what kind of ownership information is recorded by a government authority in the case of companies, the 2009 Tax Cooperation report (under the old format) noted on page 227:
"Ultimate beneficial ownership (changes need not be reported unless shares are issued to or transferred to a non-resident)."
Now compare this to the peer-reviews' result on this question (page 18):

"After incorporation, a company must advise the Registrar of a change of the company's registered office (section 62(3)), however there is no requirement to advise the Registrar of changes to the resident representative or company ownership (except in the case of equity being transferred to non-residents - see paragraph 39 below)."

This is pretty much exactly the same information as contained in the Tax co-operation report – but there are more words as the subsequent paragraph 39 then deals with details on how changes in the ownership of shares issued to non-residents must be reported (e.g. explaining that this applies to a 5% threshold of ownership).

What is missing, however, is any analysis of the potential for abuse created by this exemption of reporting of changes in the ownership. It requires little imagination to abuse this provision. A local nominee might, for example, act as the domestic beneficial owner of a company’s shares - for example, a company receiving a share of the bribe payment to a foreign politician (and we have heard of this happening). Once the company account has been opened, the US$ 10 million is transferred to it, then the shares are transferred to a Bermuda private trust administered by a local trustee from a private trust company; that trust may in fact be that of the foreign politician, acting either directly or through a second layer.

In this case, it is likely that the change of ownership does not need to be reported, because a) formally the ownership remains within Bermuda, and b) the change of control of the trustees of a private trust company does not need to be notified, and the identity of settlors and beneficiaries need not be notified for these trusts, and indeed need not be registered at all.

The politician now owns all the shares, and thus the bank account. Voilà, the bribe recipient figures on no Bermuda record.

While this kind of information is not contained in this first round of peer reviews, we hold out some hope with respect to the second phase of assessments which are expected to begin in the second half of 2012. We are encouraged by passages like the following (on the Cayman Islands):
“In respect of trust business however, two potentially significant ommissions exist, as Private Trust Companies and individuals who are carrying on trust business or merely acting as trustees (but not carrying on a trust business) are exempt from licensing requirements and the Money Laundering Regulations (2009 Revision) (Money Laundering Regulations). The practical signficance of these exclusions and of the common law obligations on trustees to maintain this information will be assessed as part of the Phase 2 Peer Review of the Cayman Islands." (page 14).
It remains to be seen how these second phase implementations turn out. The linchpin of effective information exchange, of course -- the number of pieces of information actually exchanged -- is notably absent in this report (to get an idea of the appalling ratio see table 1, page 12 and table 2, page 15 of our recent briefing paper on automatic information exchange).

Will this kind of relevant information be contained in the second phase report? Until we see numbers of the pieces of information requested and exchanged, sorted according to the origin of the requests, and also as shares of total business activity with the respective jurisdiction, these assessments will look more like exercises in Ignoring The Elephant.

Irritatingly, none of the peer reviews' content in pdf-format can be copy-pasted to other documents. It is odd that the peer-reviews do not include this (efficiency-enhancing) technical feature. But perhaps most fundamentally, it is impossible for peer-reviews to be meaningful if the standards underlying them are flawed from the outset (see this briefing paper for more on that).

The detailed assessment handbook is now also available for 45€; and the latest issue of their predecessor, the Tax Co-operation report for 2010, can be purchased here.

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