Banking in the new era of transparency

Gibraltar Magazine – August 2017
Ian Le Breton

Greetings and welcome to summer in Gibraltar. Now it’s not often that I do ‘requests’ in this column but I am making an exception this month. Cloti (although that’s not her real name) and I were discussing my article in the April edition of this magazine, which was titled ‘Digesting the alphabetti spaghetti of pensions’. “How it took me back,” she said. Instinctively I asked if she was talking about the pasta, which immediately provoked a look of serious disdain. “No, I meant taking out my first pension,” she retorted.

Cloti continued by saying she’d been in her twenties at the time and what a shame it was that young people were not doing the same thing these days. I corrected her, of course. There’s nothing to stop today’s twenty-somethings from starting to save for their retirement. Indeed with so many options available and with such a volatile economic outlook for the decades ahead, retirement planning is something to be highly recommended.

We went on to discuss the potential impact of new technologies on the job market and the prospects for home ownership in the years to come but Cloti had a bee in her bonnet. Not literally you understand. She related how during the process of opening a bank account recently, she had been asked for her TIN. Once it was explained that this referred to her Tax Identification Number, she told me she had “made her excuses and left”. “No bank is going to get that information from me,” she protested.

Silently I wished her good luck with any bank account or indeed similar process in the future. I tried to explain why the bank needed this information as part of its account opening process – or “on-boarding” to use the banks’ vernacular. Cloti was clearly of the view that we should abide by different standards in Gibraltar; I was equally keen to reassure my friend that nothing could be further from the truth and that asking for a TIN is certainly not unique to the local market.

“So you mean, Gibraltar is just following the others then?” Well yes and no I said. While Gibraltar does indeed adhere to international standards, it is also now helping to draft them and, in many areas, it is right at the forefront. Cloti suggested that I might care to explain “these things” so that people like her “could be prepared” the next time they had dealings with their bank. “I mean how are we to know our FATF from our FATCA,” she asked, “still less our TIN from our GIIN?”

So here goes, dear Cloti. Let me try to straighten out some more of the ‘alphabetti spaghetti’ when it comes to banks needing to know more about their customers. None of this should come as a great surprise as I have been writing on these subjects for many years. But it might be useful to review just a few of the areas where Gibraltar is at the front of the field. Let’s begin by looking at the often vexed question of confidentiality.

Generally, in all countries that follow English common law there is an implied duty for professional firms such as bankers, management companies and others to keep their clients’ affairs confidential. In some places, this common law duty may be enshrined in local legislation that imposes criminal penalties on those who breach confidentiality – or who attempt to get others to do so.

Confidentiality, though, is very different from secrecy. In the past two decades there have a number of international initiatives – the most important I discuss below – that are designed to increase transparency. When fully implemented, these initiatives will see secrecy disappear completely but this will not concern companies whose arrangements are legally and fiscally compliant.

In April 2016, the UK, Germany, France, Italy and Spain announced a pilot scheme to exchange beneficial ownership information relating to “companies, trusts, foundations, shell companies and other relevant entities and arrangements”. It will be exchanged “in a fully searchable format” and will include “information on entities and arrangements closed during the relevant year. The exchange is to operate as a pilot, during which participating economies will explore the best way to exchange this information with a view towards developing a “truly global common standard”. Ultimately, the system should develop into one of “interlinked registries containing full beneficial ownership information”.

This does not mean that international structures can no longer provide efficiencies. They can. Legitimate planning that utilises compliant structures has always been and remains effective. Expert advice is essential – not just to ensure the correct planning but also to demonstrate that care has been taken to achieve tax compliance.

Now on to some of that ‘spaghetti’. Let’s start with ‘KYC’, or Know Your Customer rules. As long ago as 1990, a group called the Financial Action Task Force (FATF) published a series of recommendations, which together are recognised as the international standard for anti-money laundering (AML) and combating the financing of terrorism (CFT).

Since the first draft, the FATF Recommendations have been revised to ensure that they remain up to date and relevant, and they are intended to be of universal application. That includes Cloti’s bank, as well as most financial institutions around the world.

As a result, banks worldwide now have a legal duty to implement KYC procedures for all clients, new and old. Clients must expect to supply proof of identity, proof of residential address and references. They must also explain the source and business purpose for any substantial movement of funds. Compliance with these standards brings additional costs and inconvenience but is entirely unavoidable. KYC is now mandatory everywhere.

Let’s move on to perhaps the hottest topic this summer – Automatic Exchange of Information or ‘AEOI’. Originally agreed in 2013, this initiative was put in place by the Organisation for Economic Co-operation & Development (OECD) and is generally referred to as the Common Reporting Standard or ‘CRS’ for short. But what does it mean in practice?

CRS provides for annual automatic exchange between governments of financial account information, including balances, interest, dividends and sales proceeds from financial assets. Governments receive this information from financial institutions and it covers accounts held by individuals and entities, including trusts and foundations. The first information exchanges are taking place this year, with the remainder to follow in 2018.

Regular readers may recall me writing in the past about the US version of CRS known as the Foreign Account Tax Compliance Act or ‘FATCA’, which came into effect in 2014. It is designed to target non-compliance by US taxpayers using foreign accounts. Again, foreign financial institutions (FFIs) and certain other non-financial foreign entities are obliged to report information to the IRS, either directly or via their local revenue authority, about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest.

I could go on. A further example is known as Base Erosion and Profit Shifting or ‘BEPS’ initiative under which companies doing business globally will be obliged to report their income and what taxes they have paid – but maybe that’s for another day.

As someone who has been involved in business locally for many years, and who has also monitored the development of these various initiatives, there are a couple of points on which to end.

This is not some passing fancy – increased transparency and reporting are here to stay. Gibraltar is fully compliant with her obligations and that is rightly something to celebrate. I won’t tell Cloti, but she isn’t going to get her account opened without disclosing her TIN – spaghetti or otherwise. Nor will the rest of us.