Andres Knobel ■ The US can be blacklisted under the OECD’s new rules due to a forgotten commitment

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a gavel on a desk

We recently criticised the report the OECD sent this month to the G20 which hinted that 15 (mostly small) jurisdictions are at risk of being blacklisted. We reiterated our concerns over the new OECD criteria to identify tax havens, particularly because of one arbitrary caveat, which looks like it was added just to let the US off the hook. But thanks to the useful memory and analysis of Alex Cobham, our chief executive, we’ve realised that the US should be blacklisted, even if we abide by the OECD’s capricious rules.

In 2014, automatic exchange of information finally became the new global standard for exchanging information, which the Tax Justice Network had been advocating since 2005. Therefore, when the G20 asked the OECD to come up with “strengthened” criteria to identify tax havens, the OECD rightly added an “immediate trigger” about automatic exchange of information.

Until then, jurisdictions simply had to meet two out of three requirements: (1) compliance with “exchanges upon request” (the old but surviving global standard for exchanging information), (2) commitment to automatic exchange of information (the new global standard) and (3) signing the Multilateral Tax Convention on Administrative Assistance (that would enable both types of exchanges of information). With the strengthened OECD rules, however, it wasn’t enough to comply with two out of three if automatic exchange of information wasn’t one of the two met requirements.

As we described in our blog about the previous version of the OECD’s criteria and in our blog about the truth-stretching “largely compliant” rating awarded to the US by the OECD’s Global Forum, the OECD faced a challenge when designing the new rules: how to actually become more strict on countries, while ensuring that the US would not be disturbed? We hypothesize that they came up with a clever plan: engineering compliancy ratings that were subject to discretion, and when this wasn’t possible, to simply “fix” the requirements themselves.

The US met the first requirement by achieving a “largely compliant” rating on the exchange of information on request. While the Global Forum considers most countries to be “compliant” and “largely compliant”, that the US has achieved a “largely compliant” rating in the second round of reviews is outrageous, particularly because  in this round a country’s rating must reflect how well it ensures availability of beneficial ownership information. Not only does the US not register any beneficial ownership information, it doesn’t even ensure that more basic legal ownership information is registered. It’s not just the Tax Justice Network’s Financial Secrecy Index that has called out the US for its poor performance on legal and beneficial ownership availability.  The Financial Action Task Force (FATF) also rated the US as “non-compliant” in respect to effective implementation of beneficial ownership (this is assessed by immediate outcome 5, where the US got the lowest possible rating, “low level of effectiveness”, that would be equivalent to a “non-compliant”). The FATF also rated the US as “non-compliant” in respect to Recommendation 24 on the legal framework on beneficial ownership of legal persons.

For the other two criteria, the OECD had to manipulate the actual requirements (similar to corrupt countries that manipulate bids for public procurement).

Since the requirement on the Multilateral Tax Convention was beefed up from “sign” the convention to actually “have it in force”, the OECD added an alternative: “or have a sufficiently broad treaty network”. The US is the only major country not to have the Multilateral Tax Convention in force (they are only party to the original Convention that excluded developing countries and failed to ratify the amended Convention that is already in force for 112 jurisdictions). The OECD never defined what “a sufficiently broad treaty network” means, but we have no doubt they would consider the US’s treaty network to be sufficiently broad.

Up until now, the farfetched compliancy ratings and loophole-ridden requirements gave the US enough slack to meet two out of three requirements, but how could the US avoid the new immediate trigger about automatic exchange of information?

The OECD came up with a ridiculous caveat.

The immediate blacklist for failing to implement automatic exchange of information pursuant to the OECD’s Common Reporting Standard would be triggered only if a jurisdiction “contrary to its commitment to the Global Forum to implement the AEOI Standard by 2018, [has] not met the AEOI [automatic exchange of information] benchmark”.

This is worse than accepting the excuse “the dog ate my homework”. According to the OECD, the homework wasn’t even required, because the student never committed to submitting it in the first place! Fulfilling one’s commitments may be relevant to hold someone to account for their promises. But the OECD blacklist is supposed to identify jurisdictions that failed to be transparent, not those that broke their promises to be transparent.

This “commitment to automatic exchanges” caveat looks especially suspicious when compared to the other two requirements: jurisdictions must have a “largely compliant” rating and the Multilateral Tax Convention in force, regardless of any commitment to achieve those results.

To leave no doubt, the Global Forum 2018 report on automatic exchange of information described

“All jurisdictions asked to commit to the Global Forum’s AEOI Standard have now done so, except the United States.” (emphasis added)

We had celebrated that the Global Forum had finally called out the elephant in the room, that the US isn’t participating in the Common Reporting Standard for automatic exchange of information. But very likely, the purpose of this paragraph wasn’t to make us happy, but to leave no doubt that the US had never committed to automatic exchange of information in the first place (so that the immediate blacklist wouldn’t be triggered).

We thought the OECD and the US managed to get away with it, but then our Chief Executive Alex Cobham recalled an OECD declaration of May 2014 signed by the US showing that the US did commit to implement the OECD standard for automatic exchange of information:

“WE, THE MINISTERS AND REPRESENTATIVES of … the United States…

WELCOMING the OECD Standard for Automatic Exchange of Financial Account Information, which provides the key elements for establishing a single, common global standard for the automatic exchange of financial account information (hereafter “the new single global standard”)…

4. ARE DETERMINED to implement the new single global standard swiftly, on a reciprocal basis. We will translate the standard into domestic law, including to ensure that information on beneficial ownership of legal persons and arrangements is effectively collected and exchanged in accordance with the standard;…” (emphasis added)

This explicit declaration signed by the US confirms that the US did commit in May of 2014 to specifically implement the OECD’s Common Reporting Standard for automatic exchange of information: the declaration refers to the “new single global standard” and the recitals specify that this refers to the OECD standard. This means that the US’s commitment to automatic exchange of information was not a generic one that could have been fulfilled for instance, by the US Foreign Account Tax Compliance Act (FATCA) framework.

What is there left to say against such a blatant declaration of guilt? Perhaps some may argue that the US “declared to be determined” (but not “committed”) to implement the OECD standard. Or maybe that the US committed “to the OECD” but not “to the Global Forum” about implementing the OECD standard – the Global Forum happens to be part of the OECD. The grounds left for not blacklisting the US under the OECD’s rules are as narrow as the hairs these counterarguments would seek to split.

We hope the OECD won’t use these unscrupulous arguments, and instead will right a long standing wrong by blacklisting the US until they implement the OECD standard for automatic exchange of information. On a side note, the OECD could also hold the US to account on their other promises “including to ensure that information on beneficial ownership of legal persons and arrangements is effectively collected” since the US failed on this too.

If the OECD continues to undermine their own rules, throwing away any remaining credibility in order to avoid speaking truth to power, the EU should set aside this distortion when it comes to their own listing of non-cooperative jurisdictions. The OECD has demonstrated it cannot be used as a neutral arbiter, and any objective application of the EU’s own underlying criteria would require the US to be listed. We would, of course, recommend our earlier proposal to enlist US financial institutions as lobbyists for progress by reciprocating the FATCA threat of a 30% withholding tax.

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