Why bank reporting is essential for information exchange

An interview with TJN's Markus Meinzer, in the International Tax Review, reproduced here with permission.

TJN’s Markus Meinzer looks at why bank reporting obligations are vital for AIE

21 August 2012 (Salman Shaheen - ITR) - The Tax Justice Network and CCFD-Terre Solidaire have a new report out today exploring lessons for registries of trusts and foundations and for improving automatic tax information exchange (AIE). International Tax Review talks to the report’s author, Markus Meinzer, on the deficiencies he uncovered, the positive examples he’s found and the challenges to increasing transparency over beneficial ownership.

International Tax Review: Why do you believe bank reporting obligations and bank account registries are a precondition to automatic information exchange?

Markus Meinzer: The overwhelming majority of financial wealth is ultimately held in a bank account or a safe deposit box. In the absence of bank account registries there is a risk that any AIE-system of banking data will not cover all relevant financial accounts, which invites creative non-compliance. The recent banking scandals have shown that some bankers were very creative in hiding subsets of accounts from reporting obligations, for example under the Qualified Intermediaries (QI) programme.

A more recent example concerns the life insurance wrappers offered by Credit Suisse Life Bermuda to German tax evaders. Credit Suisse ran bank accounts in Switzerland in the name of another financial institution, the Credit Suisse Life Insurance, without identifying any beneficial owner. Credit Suisse Life Bermuda in turn provided these life insurance wrapper accounts to their German clients using the disguise that the accounts belonged to a financial institution, thereby avoiding the European Savings Tax Directive (EUSTD) withholding tax. Such an arrangement would avoid the scope of the bilateral Swiss deals with little chance of remedying this problem without a multilateral platform or a bank account registry which allows checking for accounts held allegedly in the name of other financial institutions.

If regulators and tax administrations allow discretion over what kinds of account can be operated by banks, this invites bankers to devise new kinds of accounts which are beyond the scope of reporting obligations. Germany for instance operates 582 million financial accounts and the Financial Action Task Force estimates that around €1.3 billion ($1.6 billion) of wealth owned by non-residents is invested in German financial institutions. Without a minimal bank account registry recording basic data of all of these financial accounts in Germany, we would not be able to ascertain how many accounts there are, nor start any serious supervision of reporting obligations.

Countries which politically push most consistently for AIE, such as Australia, Denmark, Finland, France, the Netherlands, Norway and Spain, are countries which have far-reaching bank reporting obligations. There seems to be a tendency to bilaterally share with selected foreign tax administrations information that has been collected. Without information being collected, AIE is technically and politically more costly to implement.

ITR: What are the most serious deficiencies your study has uncovered in terms of reporting obligations?

MM: A principal finding is the wide range of observed differences in bank reporting obligations, ranging from the complete absence of reporting obligations to far-reaching registration requirements of bank accounts. This puts barriers in the way of reining in the financial sector and tackling excessive inequality because international differences in banking practices will slow down any coordination and cooperation.

Clearly, the absence of stringent reporting obligations such as in Austria and the US is a major problem. It is of paramount importance to ensure that countries have in place a system of bank account registration. Without such a system, it may be impossible to assess a bank’s compliance with reporting and anti-money laundering and similar obligations. This principle is fully in line with a recent recommendation issued by the UN and the World Bank.

While most countries except Austria and Germany require at least some interest payments on bank deposits to be reported routinely to the tax administration, only five countries operate one central database of bank accounts at the tax administration level: Argentina, Denmark, France, the Netherlands and Spain. Four countries do not operate such a database, but have sometimes multiple databases at bank level with very basic account information (Germany) or a database of taxpayers which incorporates all interest payments (Finland). Two countries do not operate any comprehensive system (Austria and the US).

In technical terms, the major problem seems to centre on the definition and identification of the “beneficial owner” of financial accounts and interest payments, the full details of whom are sometimes not covered by the reporting obligations even when banks are obliged to collect the information. Another weakness concerns the frequent absence of criminal sanctions for failure to correctly comply with reporting and registration obligations. Only Denmark, the US and the Netherlands have criminal sanctions for failure to correctly report. In Germany, a breach of the reporting obligations for the bank account registry is classified as a misdemeanor even in cases of willful misreporting and is punishable by a maximum fine of €150,000. Also, it is questionable whether the scope of the reported information is broad enough if only interest payments are included. The average account balance in addition to interest payments appears to allow better prevention of tax evasion in view of zero-interest accounts to hide wealth in a low interest environment.

ITR: Are there any particularly positive examples other countries could learn from?

MM: Of the six countries for which full information was available on all reviewed criteria (Argentina, Denmark, Finland, Germany, the Netherlands, US), Denmark stands out because it imposes identical reporting obligations for residents and non-residents. In all other surveyed countries, less stringent obligations apply when non-resident beneficial owners/recipients of bank accounts/interest payments are involved. This highlights the endemic nature of tax haven behaviour in today’s world – countries dispense with central beneficial ownership registration across the board, and/or they impose less stringent identification requirements for non-residents. Denmark’s bank account reporting and registry serves as the current benchmark for other countries.

ITR: Have there been any notable improvements since the OECD 2000 report?

I found that some of the reviewed countries have improved and expanded their reporting obligations and thereby enhanced financial transparency since the last OECD report in 2000. Important progress was made by Australia, Spain and the Netherlands. Modest improvements were made by Denmark and Germany, though Germany has subsequently backslid since 2009 when it narrowed access to bank account registries in the case of non-resident accountholders and beneficiaries.

No substantial and apparent improvements were made by Austria, Finland, France and Norway, with the important proviso that Austria has no bank account reporting or registry mechanism whatsoever, while Finland, France and Norway have far-reaching bank account reporting obligations.

Since 2000, the US has experienced an overall deterioration in the reporting obligations through the introduction of the QI programme in 2001. While in the year 2000, interest payments to non-resident aliens were not reported by failure to include them in the reporting obligations, the QI-rules were designed to bypass the usual reporting regime and created anonymous investment opportunities in financial assets and accounts by non-residents as a carrot to induce foreign financial institutions to cooperate with the IRS on US financial accounts. This situation with QI has not been remedied by recent 2012 IRS regulations to require the regular reporting of bank interest about certain non-residents from January 1 2013.

There is a risk that some countries, such as Austria, the US, and Switzerland, are attempting to exploit the general thrust of improving transparency by failing to engage in the race to the top and by continuing the disastrous race to the bottom instead.

ITR: What are the main challenges to increasing transparency when it comes to beneficial ownership?

The key challenge is ensuring implementation of existing customer due diligence requirements by banks and the creation of registries of beneficial owners not only of bank accounts, but also of legal entities and arrangements such as limited liability companies and trusts and foundations. While it is a good start to impose strict beneficial owner identification requirements on banks for financial accounts, this is not sufficient by itself. The implementation, supervision and enforcement of these obligations are a great, unresolved challenge both with respect to the FATF recommendations and the EU-anti money laundering directive. Part of this problem consists of a lack of meaningful statistical data for instance about the numbers of accounts held in the name of legal entities, of accounts with beneficial owners different from the accountholders, or of accounts held by legal arrangements without a known beneficial owner.

Banks are not under sufficient pressure to ask searching questions about the real people hiding behind legal structures, and any single humanly designed system cannot be expected to perfectly overcome this problem. Therefore, there are good reasons to create a second line of defense by requiring beneficial ownership of legal entities and arrangements to be registered separately, and it would be wise to have properly staffed and resourced public registries in charge of this task.

If, as the current Global Forum standard does, private agents are made the responsible agents instead, the agents will almost invariably follow self-interest rather than public interest, which means the standard will inevitably fail.

The full report can be read here.