6 AUG 2018
Henry Brandts-Giesen considers the privacy implications of extending anti-money laundering legislation.
The right to privacy is essentially the freedom from intrusion by others in an individual’s personal life or affairs. Privacy is protected by law and is a basic, but not absolute, human right.
Privacy obligations also arise in, and can be varied by, contracts and other commercial and professional relationships. Total privacy does not exist as various laws, correctly, override the right.
Over the years privacy rights have been abused by tax evaders and criminals. This mischief arguably contributed to a proliferation in offshore wealth structuring, as wealthy people and multi-national corporations set up bank accounts, companies and trusts in so-called "tax havens".
However, globally, a paradigm shift is happening. Data about our everyday lives is increasingly available and valuable, meaning that our privacy is not as protected as it once was. Some of this availability is volunteered by individuals who willingly share photos, information and other data on digital platforms.
But much of this availability is involuntary. Financial institutions and professionals are being compelled to gather and disclose customer data to the regulatory, law enforcement and government agencies who are cracking down on money laundering and tax evasion.
Money laundering is thought to pervade, to some degree, all economic, political and social institutions. When all the assets and liabilities of every country in the world are added up, in theory, they should balance.
However, economists have attempted to do this and there exists a significant "black hole" where assets are unaccounted for. This affects financial markets as money is moved across borders, thereby influencing exchange rates, interest rates, inflation, employment and economic stability.
Anti-money laundering (AML) and countering the financing of terrorism (CFT) laws and regulations are aimed at detecting and preventing this type of activity.
Tax evasion is the illegal failure to pay taxes. Tax evasion is a crime in almost all developed countries, and the perpetrators are liable to fines and/or imprisonment.
Tax evasion has historically been distinguished from tax avoidance, which is the legal structuring of affairs and use of laws to reduce liability to pay tax. Furthermore, the common law once provided that one country would not help another to collect taxes purportedly owed to that other country.
The problem is that these well-intended principles have been abused over many decades and a consequence has been large scale underreporting of wealth and income. The response by tax authorities has been to blur the distinction between tax evasion and tax avoidance. Both are now typically viewed as forms of non-compliance intended to subvert a country’s tax system.
In recent years, revenue-starved governments, led by the US and OECD, have joined in a fight against tax evasion. The United States Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) are the latest manifestations of their efforts.
FATCA and CRS aim to combat offshore tax evasion on a global scale. The regimes are fundamentally different to previous mechanisms used to prevent tax evasion because they place the onus of tax reporting on the financial institutions used to hold assets rather than the individual account holders themselves.
They represent a generational change in the way personal financial information is gathered, held and exchanged between financial institutions and governments. They also fundamentally challenge how long-established property and privacy rights are interpreted and upheld.
Essentially, under FATCA and CRS, the world has evolved from a system in which countries could request from other countries the exchange of information about their residents to one where financial data is now exchanged automatically between governments. This is highly significant from both practical, legal and sociological perspectives.
AML/CFT, FATCA and CRS regimes represent significant changes to the ordinary course of business for financial institutions and professional firms. The regimes have many similarities and require businesses to gather much more information before accepting client engagements.
The regimes also impose obligations on businesses to disclose information to law enforcement and government agencies, in certain circumstances. This is a paradigm shift from the traditional "trusted advisor" role for many financial institutions and professional firms. It will also cause an increased cost of doing business — both for the service provider and the customer.
These regimes are also a paradigm shift in the way that laws are enforced. Enforcement agencies and revenue authorities have shifted emphasis from the traditional approach of investigating offenders directly. Instead they are imposing information gathering obligations on the third parties and intermediaries with whom those offenders interact and have professional relationships. In terms of effectiveness, this "outsourcing" may be equally as brilliant as it is controversial.
All manner of human rights issues arises from this new approach to law and tax enforcement, from risks of open access to justice, to existential threats to the very foundations of democracy.
However, the reality is that these compliance regimes have been implemented and are here to stay. The Rubicon has been crossed and financial institutions and professionals must meet the challenge of compliance.
What this wholesale erosion of privacy means for our society remains to be seen.