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Andres Knobel, Markus Meinzer ■ The end of bank secrecy? Bridging the gap to effective automatic information exchange: An Evaluation of OECD’s Common Reporting Standard (CRS) and its alternatives

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The end of bank secrecy? Bridging the gap to effective automatic information exchange: An Evaluation of OECD’s Common Reporting Standard (CRS) and its alternatives

In July 2014 the OECD published Commentaries on the Common Reporting Standard (CRS) published five months earlier, fulfilling the G20’s request to develop a global standard on Automatic Information Exchange (AIE) of tax data. This report offers a comprehensive evaluation of the CRS and its alternatives. Firstly outlining the case for the automatic exchange of confidential financial data, before an overview of the existing frameworks. Then an in depth discussion of the CRS and its likely effectiveness. Overall, many loopholes remain to be fixed, entry barriers for developing countries need to be lower, and even the current CRS provisions will have to be monitored to ensure their proper enforcement (especially by secrecy jurisdictions). However, a global AIE framework with the potential to benefit all countries is a major transparency breakthrough. 

On July 21st, 2014 the OECD published Commentaries on the Common Reporting Standard (CRS) published five months earlier, fulfilling the G20’s request to develop a global standard on Automatic Information Exchange (AIE) of tax data.

Although the objective is that CRS should become the “global” AIE standard, it will not be the only AIE system in place. For instance, the European Union Savings Tax Directive (EUSTD) or the US’s Foreign Account Tax Compliance Act (FATCA). In fact the CRS was adapted from FATCA. However, unlike FATCA and the EUSTD, the CRS is, at least in spirit,—supposed to be open and multilateral, not only in its scope, but also when offering benefits to all countries.

Nevertheless, the potential of the initiative does not seem to have been fully realised by the CRS. A first problem consists in the artificial limitations that have been included regarding the use of the data to fight money laundering and corruption. The CRS explicitly restricts the use of the information received to tax purses, and explicitly prohibits sharing information with law-enforcement authorities, which prevents cost-free synergies for fighting corruption and money laundering to be fully harvested.
Furthermore, entry barriers do not look particularly low for developing countries: there are no provisions on non-reciprocity in their favour (to first only receive information). On the contrary, non-reciprocity is offered only to tax havens (jurisdictions without income tax), for whom receiving information and discarding it was apparently not enough: they ensured that no data would ever be collected about their residents. This desire to perpetuate opacity seems to be an odd wish under a new transparency framework and highlights that some jurisdictions are betting on defending their offshore finance industry by selling tax residency certificates which offer escape routes to criminals. For the same reasons, the US appears willing to postpone or even sidetrack multilateral AIE, offering only very narrow reciprocity via FATCA and thus positioning itself as a monopolistic secrecy jurisdiction.

Seemingly, the problem in much of the CRS’ design is related to institutional problems with the OECD, a group representing only developed countries (instead of a more representative one like the UN Tax Committee), designing a standard that was supposed to benefit all, especially developing countries.
Notwithstanding its moral obligations, the OECD could have realized that a more welcoming framework for developing countries was in the best interests of developed countries: since the CRS will only be effective once all jurisdictions participate, the longer it takes for the rest of the world to be part of it the higher the chances for tax dodgers and money launderers to keep avoiding transparency.

In conclusion, many loopholes remain to be fixed, entry barriers for developing countries need to be lower, and even the current CRS provisions will have to be monitored to ensure their proper enforcement (especially by secrecy jurisdictions). But all in all, a global AIE framework with the potential to benefit all countries is a major transparency breakthrough. 

Key findings

  • The Common Reporting Standard represents a major transparency breakthrough. However it is only a partial step in the right direction, with many limitations.
  • The standard does not include several key aspects of existing automatic information exchange frameworks.
  • The standard contains many loopholes relating to the territorial and institutional scope, the content of the information which will be reported, and about whom. 
  • The benefits of automatic information exchange are not guaranteed to extend to developing countries, which need this information the most as the most significantly affected by illicit financial flows.
  • Limiting the exchange of information to tax purposes only fails to harness the capabilities of a good framework to tackle the broader, related issues of non-tax related illicit financial flows. 

Key recommendations

  • Close the many identified loopholes, starting with a unique multilateral competent authority agreement for all jurisdictions to engage in automatic information exchange with each other in a consistent way.
  • “Fight against Corruption” and “Anti
  • Money Laundering” should be added to the “tax” purposes of automatic information exchange, to tackle illicit financial flows more broadly.
  • Include aspects of existing frameworks to improve the standard. These being the European Union Saving Tax Directive’s Paying Agent Upon Receipt and the US Foreign Account Tax Compliance Act’s 10% ownership threshold and 30% withholding tax.
  • Automatic information exchange relies on public central registries of beneficial ownership for all entities and arrangements. Therefore the development of these registries should be advanced to this end. 
  • In order to ensure developing countries’ prompt implementation of automatic information exchange, address the five issues of: capacity building, multilateral engagement, non-reciprocity, proportional confidentiality requirements and sanctions or incentives for compliance.

Additional resources