Tax: offshore confidential

Robert Kirkby, Jersey Finance Limited

There are many myths borne of increasingly ill-informed criticisms on the standing and status of Jersey and other British Crown dependencies. But it has high standards of regulation in its financial services industries, providing an attractive environment for international investors at the same time.

Customary laws to protect privacy in Jersey are considered robust, but they differ from the banking secrecy laws prevalent in some mainland European jurisdictions, which are coming under increasing scrutiny by the EU.

As a result, there is mounting pressure for them to abandon their secrecy barriers. But Jersey is not a bank secrecy jurisdiction and is not facing demands to amend its laws.

Striking a balance

Indeed, the Jersey authorities try to balance the demands of the OECD drive for greater information exchange, while at the same time maintaining the privacy of legitimate clients’ financial affairs.

For example, where information exchange is required, international judicial authorities may ­ through the island’s investigation of fraud law or the criminal justice (international co-operation) laws ­ can seek assistance where they believe a tax fraud has been perpetrated in their jurisdiction.

Although these laws are portals, they are not a route of automatic exchange of information and the requesting authority must provide sufficient evidence to satisfy Jersey’s attorney general that there is a case to answer. This prevents those costly ‘fishing expeditions’ for private clients.

The British Crown Dependencies also face criticism from some political quarters in the UK for inadequate regulation, a claim that is entirely at odds with the true position. Regulatory standards in Jersey are high.

The Treasury has publicly listed Jersey as a country it considers as having anti-money laundering rules equivalent to the EU’s Third Money Laundering Directive. Furthermore, the IMF and the Financial Action Task Force have r ecognised Jersey’s supervisory regime as having appropriate levels of control for tackling money laundering. The IMF reviewed Jersey in 2002 and said it had ‘a clean bill of health’.

It added: ‘Jersey has a robust supervisory framework and adequate legal system.’

They are in Jersey now for a further routine visit. The Island authorities are determined to demonstrate that standards of regulation are, if anything, higher than onshore, so that they will again provide a positive endorsement of the island’s standing.

Evasive manoeuvres

When critics accuse places such as Jersey of ‘encouraging tax evasion’, they ignore the supervisory rules that are in place. Jersey-based finance professionals, lawyers, accountants and trust and estate planners ­ many of them UK trained ­ have to report suspicious transactions, including suspicion of tax evasion. Failure to do so can lead to a custodial sentence, reinforcing the seriousness of the island’s authorities approach both to tax evasion.

Critics also claim that a jurisdiction such as Jersey lacks substance but, with more than 1,000 qualified accountants, 300 chartered secretaries and 1,100 members of the Society of Trust and Estate Practitioners in a total financial services workforce of more than 13,000, this is clearly not the case. The Big Four professional services firms and many other global brands all have substantial operations in the island, an illustration of the depth and quality of service providers in the Island.

Jersey’s finance industry firmly believes that client privacy is fundamental to its continuing success as an international finance centre and we continue to uphold the highest global regulatory standards.

The right to privacy

Some overseas practitioners erroneously claim that centres such as Jersey make confidential information available too easily to international authorities because of increasing global pressure to do so.

Naturally, this is an area of particular concern to the international private wealth industry, where privacy and confidentiality are valued. This issue has taken on renewed significance in the UK following the successful HRMC Commissioner's Hearing in 2007 in relation to information held about clients resident in the UK with offshore bank accounts.

Legal and tax experts have analysed Section 20 ('the notice') of the Taxes Management Act 1970 in terms of its impact on Jersey and the associated Jersey legal position.

The common view is that HMRC would not be able to compel information to be disclosed by Jersey subsidiaries or branches of UK institutions, provided always that the documents requested were not held in the UK and were not in the 'possession or power' of the person subject to the notice. To ensure that such information is not in the 'power or possession', many institutions have infrastructure that has been appropriately structured geographically.

There are persuasive authorities to support this position, including a number of court cases, which have been cited to reinforce the view that HMRC's powers would not compel a Jersey subsidiary to disclose information without the consent of the client.

In Paul Walsh v National Irish Bank (2007), the Irish High Court held that no order would be made to compel the defendant to require its Isle of Man branch to release documentation without consent.

The decision appeared to revolve around the Irish equivalent to Section 20(8A). The Irish High Court referred to English authorities to support its decision that an offshore branch is subject to the laws, including the confidentiality laws, of the jurisdiction in which it is situated.

R v Grossman CA (1981) also supports the proposition that documents held by Jersey subsidiaries or branches of a UK bank are protected by banking confidentiality.

The Inland Revenue, as it was then known, sought account information about a person suspected of tax evasion by obtaining details of a company account held in a UK bank subsidiary in the Isle of Man.

The court determined the judiciaries discretionary power under the legislation must be used with caution and concluded it would not be right for the confidence of its Manx customers to be broken for UK proceedings

Robert Kirkby is technical director of Jersey Finance Limited