The Organization for Economic Co-Operation and Development’s (“OECD”) new Common Reporting Standard (“CRS”) will allow over 100 governments to access the personal financial data of overseas account holders and owners of trusts and foundations. This article is part of a series on the new regime.
The Panama Papers hack, which unlawfully leaked 11.5 million files containing highly sensitive information, not only compromised the privacy of millions of victims, but also placed those victims’ lives and well-beings into peril. In retrospect, the hack is a blatant reminder that privacy is now being openly and effectively targeted. For families conducting legitimate cross-border business—whether it is facilitating family governance, succession planning, estate administration, and philanthropic activities or protecting future generations—the Panama Papers must be viewed within a larger context. It is just the most recent stage of a global tax crackdown that has manifested itself in many forms such as the U.S.’ FATCA and the OECD’s CRS.
The Common Reporting Standard, or CRS, is a new inter-government data-collection and information-sharing program established by the Organization for Economic Cooperation and Development (“OECD”) to improve tax collection on private wealth held overseas. Under CRS, financial institutions are required to collect and share the financial and personal data of foreign account holders with any other CRS-participating government to which the account holder is obligated to pay taxes. CRS is set to roll out between 2017 and 2018 in over 100 countries.
Below we discuss the relationship between the Panama Papers and the new CRS regime and how and why they have a real impact on the average individual or family. Only by extracting from the past can we truly prepare for the impending war before us.
Timeline of Events
Panama, a major offshore private wealth jurisdiction, has had a long history of actively cooperating and sharing information with other nations on a bilateral basis in order to crack down on money laundering, terrorism and tax evasion. As part of its CRS campaign, the OECD demanded that Panama replace its bilateral relations for a CRS multilateral system. It wasn’t just about policy, though. On the most fundamental level, the OECD was really requesting that Panama cede its sovereign duty and right to make its own laws. Panama resisted the bureaucratic organization’s attempt at coercion and hired international legal counsel to protect its sovereign rights, its financial industry and those who legally participate in it.
In a letter written in November 2015, Panama clearly expressed its reluctance to adopt the OECD’s request for the automatic multilateral exchange of information, and condemned the OECD for its coercive tactics and threats to national sovereignty and tax competition. The letter also highlighted the hypocrisy within the CRS system: the United States had opted out of the multilateral CRS regime in order to maintain its bilateral exchanges under its own information sharing system, FATCA. The U.S. has received no backlash from the OECD for its actions. In its official position on CRS published in December 2015, Panama requested that the OECD respect its right to do the same.
Soon thereafter, on May 9, 2016, the U.S.-based International Consortium of Investigative Journalists (“ICIJ”) released the private information of thousands of clients of Panamanian law firm Mossack Fonseca. This incident became known as the Panama Papers. Many have noted the irony surrounding the leak – journalists, a group that has traditionally championed anonymity and privacy, have now become the shock troops deployed to erode the privacy rights, confidentiality and safety of the innocent. This case has massive implications related to the ethics of journalism; but even more importantly, the long and short term implications of the ICIJ’s quest to ignite a global revolution that threatens privacy, attacks trusts and foundations, and jeopardizes the rights of individuals and families, are immeasurable.
The Context: What Is Really Happening
The Panama Papers is the latest scene in the ongoing David and Goliath story that lawyers, wealth managers and the financial industry are calling a not-so-subtle war on tax competition. Simply put, there are two main groups of actors on stage: one is small island nations in sunny locations that have become financial hubs and oftentimes offer low tax rates; and the other is major developed nations in colder climates such as the US, the UK and other OECD nations that view the island jurisdictions as competitive threats to their own private wealth industries and economies. Both groups are invested heavily in the private wealth arena and are thus competing to attract the same clients.
Under CRS, financial institutions are required to collect and share the financial and personal data of foreign account holders with any other CRS-participating government to which the account holder is obligated to pay taxes. CRS is set to roll out between 2017 and 2018 in over 100 countries.
The current crisis reflects two “fouls.” The first foul is that the smaller, warm-climate island nations that attract large amounts of offshore wealth allowed their jurisdictions to be used as tools to promote tax evasion, money laundering, and terror financing. Protecting against those kinds of activities should be a shared goal for both groups of actors. The second foul is that the larger, cold-climate nations have used goal stated above as a false justification and a weapon to bludgeon privacy and legitimate wealth planning goals and structures such as trusts and foundations. These nations claim to be pursuing “globally-accepted objectives,” but in reality they are assuming the guilt of all parties without any proof or due process, attacking wealth management-based economies, and transforming the world’s financial institutions into tax enforcement agencies.
If one were to weigh the purpose of these nations’ actions against the massively negative policy and societal implications, the consequential “collateral damage” seems out of proportion and, frankly, ill-conceived. It is important that the system does not become authoritarian and coercive to the point where everyone is forced to take the medicine even though only a handful of people are actually sick. To put it in other words, innocent parties should not be assumed to be guilty without proper due process. In the context of the Panama Papers hack, the privacy and legitimate rights of 11.5 million parties were sacrificed without trial, due process or court of law. Although all had the right to the assumption of innocence, none had access to it because the entire hack occurred completely outside the control of any legal system.
Who had the right to attack those who were disclosed? Who had the right to target the nation of Panama? Imagine the commitment and determination it took to commit this act. Every wealth manager, lawyer and financial industry participant and social policy-maker must evaluate the implications of this act, as well as the potential threat to privacy and legitimate rights. If a society can have its rule of law undermined so effectively, it won’t be long until we see an Orwellian threat to the rights of the individual and privacy.
What Is the Risk to Families, Wealth Managers, and the Public in General?
The Panama Papers hack occurred because unidentified hackers were able to penetrate Mossack’s centralized database and steal 11.5 million files of proprietary information, which were then passed to the ICIJ. The rest that followed– the large-scale disclosure of private information, the negative impact on thousands of lives – is now history. The significant yet self-evident take-away here is that the unlawful seizure and disclosure of data is a massive erosion of privacy. Whether this result was perpetrated by a single hacker, ICIJ, a single government, the OECD or a group of governments acting in concert is almost irrelevant. The injury is to all stakeholders who participate in and benefit from the financial systems that create the foundation of the globalized economy.
The OECD’s CRS system requires all nations to automatically share the private financial data of all foreign account holders. The private information of citizens all across the globe will be acquired, aggregated, transmitted electronically and, finally, shared with governments globally. This “Big Brother” approach to the mass seizure of private financial information raises red flags when one considers the frequent reports of hacks, leaks and unplanned disclosures at major financial institutions and governments resulting from fraudsters, industrial espionage, disgruntled employees and negligent cyber-security protection. The Panama Papers raid is just the latest in a long list of grand data thefts, and it is most certainly not going to be the last nor the largest. Under the CRS regime, a truly global goldmine of cyber data will be born, setting the stage perfectly for the largest and most consequential heist to date.
In reality the OECD are assuming the guilt of all parties without any proof or due process, attacking wealth management-based economies, and transforming the world’s financial institutions into tax enforcement agencies.
Everyone can imagine what might happen to one’s privacy and data given the obvious realities of government-initiated data gathering and penetration. Under CRS, in particular, there are three main areas of increased risk: 1) increased collection risk, 2) increased storage risk and 3) increased transmission risk. In other words, at any point personal financial data is collected, stored or transmitted, that data is vulnerable to potential hacks. Hackers could target the weakest link at each of these three stages in order to pillage personal data and, consequently, dump it onto the Internet, where anyone could see it, use it or abuse it.
Under CRS there are three main areas of increased risk:
- increased collection risk
- increased storage risk and
- increased transmission risk.
What Are the Lessons?
- The Panama Papers hack has offered the world a preview, a glimpse of what is coming.
- The war on tax competition is escalating and will continue to do so. In the coming years, the OECD’s CRS will function as the “shock troops,” while Big Government prepares for the next stage of the war on tax competition. Undoubtedly, we can expect to see further invasive data acquisition and the mass erosion of privacy.
- The major players appear unconcerned with the erosion of the legitimate rights to privacy, the security and the wealth planning concerns of families and individuals. Whether law-abiding citizens become collateral damage in the war on tax competition or whether the financial industry and society bear the brunt of the cost of CRS implementation do not appear to be a concern for Big Government.
- Concerned families should consult their wealth advisors to learn more about the threats posed by the CRS regime. Together with advisors, trust and foundation holders can evaluate any potential exposure and devise solutions that respect CRS disclosure requirements while protecting their legitimate interests. By acting expeditiously, families can comply with CRS requirements and safeguard their privacy.