18 Feb 2015 04:51pm

The dark side of bank secrecy

Stefano Simontacchi, managing partner at international law firm Bonelli Erede Pappalardo asks if it is finally time for a radical change over bank secrecy

In October 2011, the OECD issued a report entitled “The Era of Bank Secrecy is Over” in which it described the most recent results delivered within an ongoing project to tackle tax evasion carried out through the exploitation of bank secrecy.

The report stated, "The OECD is encouraging corporate boards to see tax compliance as an integral part of good corporate governance […]. These initiatives are already yielding results. HSBC, for example, in its annual report states «all group companies are required to observe the letter and spirit of all relevant laws.”

Tax administrations should take advantage of this particular moment in history, prosecuting without hesitation unlawful taxpayers

This statement nowadays sounds dramatically ironic, in light of the latest development in what is being called the SwissLeaks, i.e. the unauthorised divulsion of compromising account information by a former employee of a Swiss HSBC subsidiary. This huge banking leak, in fact, casts dark shadows on HSBC's conduct and on its potential involvement in disguising clients’ untaxed assets. Whistleblowers say HSBC is not the only banking group involved in this kind of misconduct, which inevitably triggers a few questions: how effective are exchange of information procedures nowadays? What impact, if any, will the HSBC scandal have on bank secrecy’s future?

Since the publication of “The Era of Bank Secrecy is Over”, significant progress has been made in the field of tax information exchange. In 2014, for instance, the OECD successfully promoted the implementation of a single common global standard for the automatic exchange of tax information. Under this standard, jurisdictions should obtain financial information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. More than 90 jurisdictions have already committed to a tight implementation timetable that will see the first automatic exchanges take place between 2017 and 2018, subject to completing necessary domestic legislative procedures.

A further blow to possible misuses of bank secrecy was given by the Financial Action Task Force (FATF), which, in 2012, approved the revised recommendations for fighting money laundering, suggesting the inclusion of tax offences among the predicate offences of money laundering. Failure to adopt this measure by a certain state would lead to its inclusion in the list of non-cooperative jurisdictions identified by the FATF. This means that, subject to national implementation of the FATF standards, financial institutions could find themselves in the position of being charged with criminal offence (i.e. money laundering) for being involved in the management of financial resources deriving from tax evasion.

Besides the higher level of transparency called by the OECD and the pressure for deeper scrutiny required by the FATF, an additional factor should be considered in analysing the current landscape, i.e. the change in tax administrations’ attitude toward compliance. In light of the changing environment, in fact, countries are gradually adopting a more cooperative approach to tax compliance and are enforcing voluntary disclosure programs. This should not come as a surprise: in 2010 the OECD published a report concerning voluntary disclosure programs in which it clearly stated that such programs are the natural consequence of the unavoidable process of abolition of the bank secrecy.

In such an evolving landscape, the impact of big banking scandals such as the SwissLeaks fuore are threefold. On one side, these scandals might drive the fight against tax evasion (through the exploitation of bank secrecy) to an even higher level on the agendas of tax administrations and institutional organisations (even though this topic is already regarded as a priority at international level, as confirmed during the last G20 summit held a few days ago in Istanbul).

Secondly the reputational damage, the administrative penalties and the criminal offences that inevitably come with scandals connected to banks' misbehaviours should seriously alert financial institutions to the damaging implications that can result and push them to enforce effective corporate governance systems to find out potential misconducts.

Lastly, the most significant impact of these kind of scandals, however, might be on the taxpayers’ side. The fear of being detected due to the revelations of some whistleblower (or due to related tax investigations) could speed up the decision of unscrupulous taxpayers to come forward and make a voluntary disclosure on possible irregularities. Most of the existing voluntary disclosure programmes provide important advantages for the taxpayers themselves. Reductions of administrative fines or of criminal penalties can be provided for instance, depending on the case. A growing number of taxpayers may decide to disclose their own position due to the perception that continued non-compliance is highly risky, instead of waiting for the tax administration to come after them (in which case, they would most likely lose all the advantages granted in the case of voluntary disclosure).

Seen from this perspective, the present situation offers great opportunities for all the players involved to start a virtuous circle. Tax administrations should take advantage of this particular moment in history, prosecuting without hesitation unlawful taxpayers but - at the same time - showing willingness to cooperate and making all the possible attempts to encourage compliance.

Stefano Simontacchi is Managing Partner and Head of Transfer Pricing at international law firm Bonelli Erede Pappalardo




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