Double-Layer Secrecy: add Lawyer Confidentiality to Banking Secrecy

   0   0 Beneficial Ownership, Blog, Secrecy

Global automatic exchange of banking information is set to start among countries that have committed to implement the OECD’s Common Reporting Standard (CRS). Similar automatic exchanges have already started between the U.S. and some countries that have managed to sign a FATCA-related Inter-Governmental Agreement (IGA) although there’s little reciprocity between Tax Haven USA and other nations.

ScalesofInjusticeWe’ve already highlighted our concerns many times on lack of access by developing countries, and loopholes related to excluded accounts and thresholds, among other problems. But here’s a potential loophole we haven’t discussed before: professional bank accounts held by lawyers on behalf of their clients, allegedly for cases where there are legal proceedings in process (e.g. to pay for the plaintiff’s claims if a lawsuit is lost, to hold assets that will be divided in a divorce, etc.)

The CRS doesn’t explicitly refer to these types of accounts. The closest example would be escrow accounts, which are excluded (we’ve called for this exclusion to be eliminated, because someone could fake a real estate purchase in order to take advantage of this exclusion. In addition, the CRS establishes no limits on the length of time escrow accounts may exist). Even if escrow accounts were no longer a problem, professional bank accounts would still cause concerns.

In principle, professional bank accounts should not be a problem. Since the CRS doesn’t explicitly exclude them, they should be considered reportable. An ‘agent, custodian, nominee, signatory or intermediary’ (e.g. the lawyer or law firm) holding an account on someone’s behalf cannot be considered the account holder. Therefore, the client or clients should be identified and reported as the account holders.

We haven’t heard any lawyers complaining about this (yet). There are three possible reasons for this.

  • One: they are complaining, but we’re not aware of it – and we need to do a better job to find out.
  • Two: lawyers aren’t aware of this yet because banks have not yet communicated clearly enough about this, or they’re comfortable complying with these requirements
  • Three: lawyers and banks are expecting the lawyer or law firm (and not the client) to be considered the account holder (in a clear, but hard-to-catch breach of the CRS) – and actually, in that case no one would be reported because if the “lawyer account holder” is a resident where the account is held, their information wouldn’t have to be sent to any other country. Therefore, it wouldn’t have to be reported in the first place since only non-residents are reported.

But one country, always ahead of the curve when it comes to loopholes and abuses, has already dealt with this issue: Switzerland has excluded professional accounts held by lawyers or notaries from reporting to the U.S. under their FATCA-IGA (the framework equivalent to the CRS, but specifically for automatic reporting to the U.S. only).

The exclusion has some limitations (accounts must be held for legal, and not financial investment, purposes such as inheritance, divorce, civil lawsuits, etc.) and providing false information would be a criminal offence. However, to draw a dividing line between the two might not always be easy, for instance with respect to merger and acquisitions, foreign direct investment transactions, etc. Furthermore, if the accounts are used predominantly for transferring assets offshore into jurisdictions not participating in FATCA/CRS, this exemption might prove an important channel through which huge transfers of funds for purposes of tax evasion, corruption and money laundering might continue to take place without impediment.

If these professional bank accounts had objective conditions, e.g. a maximum value (money) held in the account or a maximum duration of the account, then risks would at least be mitigated. Without these objective criteria, all we can do is trust that lawyers are actually using accounts for the right reason and not to help criminals hide money and assets. Should the fact that these accounts are held by lawyers make us feel any safer? For some reason names such as Mossack Fonseca come to mind…

Lawyers may claim that this is a breach of client-privilege or professional confidentiality. However, no one is asking for disclosure of legal strategies, evidence or sensitive data related to a lawsuit, but only disclosure of who really owns a bank account.

One could argue that the OECD Commentaries to Art. 26.3.c of the Model Tax Convention are somehow on our side since they explain that exchanging information on, say, who owns a company is usually not covered by professional confidentiality. One could argue the same should apply to bank accounts, since the CRS requires all bank account holders to be reported to authorities:

“A requested State may decline to disclose information relating to confidential communications between attorneys, solicitors or other admitted legal representatives in their role as such and their clients […] However, the scope of protection afforded to such confidential communications should be narrowly defined. Such protection does not attach to documents or records delivered to an attorney, solicitor or other admitted legal representative in an attempt to protect such documents or records from disclosure required by law. Also, information on the identity of a person such as a director or beneficial owner of a company is typically not protected as a confidential communication.”

A lawyer could claim that the mere fact of disclosing (to authorities, not even to the public) the identity of their clients would be a breach of professional confidentiality. While we do not necessarily agree, a practical solution could be for a bank, instead of having one lawyer professional account for many clients, to have one account for each client (each client as the account holder) with the lawyer as a mere agent with power of attorney over all those accounts. Each account (and the client’s identity) would be reported just as any other ordinary account, and no one would know that the client has a legal relationship with the lawyer.

At the very least, if professional accounts are to be excluded, countries should produce statistics, as proposed here, to track the number and values held in these excluded professional accounts, to ensure that they’re not being used for avoidance purposes.

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