By Guest Author Philip Marcovici*

The tax landscape has been fast changing. Transparency and tax compliance are becoming the norm. This is a positive development given the financial challenges faced by governments seeking to address the needs of their populations and issues around inequality of wealth. But the road to transparency is not a smooth one.

For many years, the wealth management industry has directly or indirectly supported the misuse of bank secrecy to the detriment of both interested governments and wealth owning families who are increasingly realizing that apart from being the right thing, tax compliance can be far cheaper and safer than tax evasion. There have been voices pushing for transparency and compliance over the years, but the approach of too many in the industry has been to resist change and to perpetuate the ways of the past.

Wealth owning families need to hear the truth, and to be guided by their advisors as to how to best navigate a fast-changing and increasingly transparent landscape.

In the case of the private banking and trust world, secrecy all too often was the basis for planning, with aggressive or outright evasive approaches being adopted on the logic that “no one would ever find out.”  Indeed, private banks and trust companies in a number of jurisdictions marketed bank secrecy and, in effect, tax evasion, as a luxury product, available to those with the wealth and contacts needed to attract them offshore.

Financial centres and the wealth management industry have not done a good job of proactively leading on developments in and around growing transparency. To a large extent, responses have been reactive, defending the past rather than working out how best to cooperatively address the needs of all stakeholders. This lack of strategy has resulted in the future of financial centres and the industry being dictated by others, including onshore governments, which themselves are not necessarily achieving their real objectives.

For many years, arguments on behalf of offshore centres have focused on the notion of a “level playing field,”  pointing to bank secrecy and the use of opaque structures in countries such as the U.S. as a rationale for continuing past practices. The reality, however, is that onshore countries have every right to tax their residents (and sometimes citizens) as well as foreigners who invest in their countries. But onshore governments need help from those who really understand the world of trusts and other tools used by wealth owners to arrive at ways to balance the need for information to ensure tax compliance with proper privacy protection. The industry failing to recognize this reality has led to a tsunami of over-reaction to the detriment of financial centres, the industry and the families they serve.

Financial centres have a special and important role to play in not only educating their service providers and clients on global change, but to help educate onshore and offshore governments and to help smooth out the rough road to transparency ahead. To date, not enough has been done.

Undeclared funds are a global problem, and measurement of the amounts involved is very difficult. The Tax Justice Network has reported the figures involved to be as high as over US$30 trillion. Oxfam has estimated that if taxes were properly paid by those earning the income involved, global poverty would be eliminated twice over.

The Express Train to Automatic Exchange of Information Backed up by Effective Anti-Money Laundering Rules – But Will it Always Work?

There is now rapid progress towards the adoption of global approaches to automatic information exchange, a dramatic departure from the methods of information exchange of the past, such as information exchange upon request. This progress is based on work of, among others, the U.S., the UK, the OECD and the EU.

The U.S. has made great progress in implementing its Foreign Account Tax Compliance Act (“FATCA”) approach to tax compliance, and this has, in turn, made it easier for the OECD, with the support of the UK and others, to use FATCA as a basis for the development of a global standard for automatic information exchange. The EU has been successful in moving forward with replacing the EU Savings Directive, closing loopholes, and implementing comprehensive automatic information exchange. Automatic exchange of information, particularly when linked to FATCA- like approaches that focus on the role of banks and other financial intermediaries in documenting the ultimate beneficial ownership of vehicles such as companies and trusts, represents a sea change and the full involvement of the financial services industry in tax compliance and enforcement.

The ability of automatic information exchange to address the global issue of undeclared funds is substantial. An important, but sometimes overlooked, element of tax enforcement relates to the move to have anti-money laundering rules include tax crimes as predicate offences, something that has already been introduced in many countries, including the UK, Singapore and Hong Kong. Through changes to EU anti-money laundering rules and initiatives of the Financial Action Task Force, we are a short number of years away from comprehensive anti-money laundering rules in key financial centres that include tax offences as anti-money laundering offences. Resistance from financial centres that are reactive rather than proactive is a mistake.

Combining the impact of anti-money laundering rules that are effectively enforced (today, they are not) with bi-lateral and other automatic information exchange arrangements, undeclared money should be significantly reduced. A bank, for example, in a traditional bank secrecy country  will, where the anti-money laundering rules so provide, have to be comfortable that monies on deposit are tax declared in the home country, failing which anti-money laundering reports will need to be made.

But is the implementation of automatic exchange of information coordinated with the move to ensuring that tax crimes are a predicate offence in anti-money laundering rules? Is enough being done to consider the legitimate taxing needs of developing countries whose tax and related laws may not be “ready” for automatic exchange of information, meaning that implementation of bi-lateral agreements with key financial centres will not take place for many years to come? Could financial centres and the industry benefit from a proactive approach to change that puts the interests of their clients at the centre? Is there an understanding that wealth management is a knowledge industry requiring ongoing investment in education and training at all levels?

The rocky road ahead would benefit from more in the way of strategic input rather than sleepy dreams of the past from the world’s financial centres and wealth management players. It is time to be proactive rather than reactive.


This article is an excerpt from the author’s more comprehensive review published by the Society of Trust and Estate Practitioners in connection with the Society’s Global Congress, which took place in Miami in November, 2014. The article was also published in the STEP Trust Quarterly Review, December 2014, and in excerpt form in the Winter 2014 edition of Gateway, a publication of the Bahamas Financial Services Board. The publishers are grateful to the author and to the Society of Trust and Estate Practitioners for permitting this excerpt to be part of Lombard International Assurance’s Newsletter.

© Philip Marcovici, 2015.

*Philip Marcovici is retired from the practice of law and consults with governments, financial institutions and global families in relation to tax, wealth management and other matters.

Philip was a partner of Baker & McKenzie, a firm he joined in 1982, and practiced in the area of international taxation throughout his legal career. Philip was based in the Hong Kong office of Baker & McKenzie for twelve years, relocating to the Zurich office of Baker & McKenzie in 1996. Philip has also practiced law in each of New York and Vancouver, British Columbia. Philip retired from Baker & McKenzie at the end of 2009.

In 2013, Philip received a Lifetime Achievement Award from the Society of Estate and Trust Practitioners.