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From the Managing Director's desk

Nude banking - LAVECO Newsletter 2015/3.


Cikkünk az offshore bankolás jövőbeni tendenciáit elemzi.

Ever since people started getting their hands on more and more fantastic smartphones, many users have felt the need to use them not just as telephones, but for capturing every moment for prosperity. It is now possible to take photos or videos anywhere, at any time and of any body. The human race now takes billions of pictures of itself every day, and selfies by the ton. Selfies in innumerable places, poses and situations. And, if we are talking about people, then naturally some clothed, and some unclothed. Among the youth of today, taking naked selfies and sending them to a boy- or girlfriend is extremely widespread, often resulting in the pictures being shared on the internet soon afterwards. This is the modern era, the internet world, far from the age of Victorian morals, when even a table leg had to be hidden by a specially designed cover.

There is something similar taking place in the world’s banking system. The fact that it is necessary, and has been for some time, to bare all in front of the banks is nothing new. Banks in the developed world have been asking for just about every detail imaginable, from the precise description of business activities to the source of incoming payments, in regard to both personal and corporate bank accounts for at least 15 years now, not to mention the thorough identification of the private individuals who are the ultimate beneficial owners behind the structure. Like it or not, that’s the way it is, and if you’re not prepared to strip off, then you won’t get an account, and may even be placed on a blacklist for life, so even trying again later will be fruitless. Up until now, while this was all done rather discreetly, everything was ok. From 2017, however, when information exchange is due to begin, they will then send the information they have collected from us (our naked selfies) to the tax authorities in the countries in which we are resident for tax purposes. Who these countries then share that information with and where they forward it to, well, only time will tell.

Cikkünk az offshore bankolás jövőbeni tendenciáit elemzi.I don’t think the analogy requires any special explanation. The only difference is that while I take the selfie myself, and I decide who to share it with and which parts of my anatomy to bare before my boy- or girlfriend, in the other case other people, or the banks, take the decision out of my hands, following the OECD Directive. They do all this in the name of transparency, and in the interest of fighting tax evasion. Just who was it, I wonder, if anyone at all, who appointed the OECD to be the spearhead of this fight? Or maybe they appointed themselves, as the producer of the main directive in the fight against tax evasion. And all of this is done by an organisation in which a significant number of the staff receive tax-free salaries!

From the point of view of the inquisitors, the process appears extremely successful. Today just about the entire modern financial system has been subjugated by OECD regulation. The banks slavishly put into effect any recommendations. My experiences with bankers around the world have confirmed to me that many of these people truly believe that subjecting the world to strict regulation will actually make the situation better. This is a naive belief, but I don’t want to go into that now as that would be a huge red herring...

The main point is that it is the banks that control everything, the banks which accept the rules of the game and convey them to me. If I accept them, then I can play, if not, then I have to leave the playing area: the bank is stronger. The current situation is that in this globalised world it is becoming more and more difficult to open and manage a bank account and perform banking transactions in a country other the country of residence of the beneficial owner.

The most vivid example of this in my experience was a bank in Malta. In our practice, Malta has always been something of an interesting case anyway. This small mediterranean island has been a member of the European Union since May 1st 2004. Its tax system contains many regulations which can be particularly attractive to foreign investors and can/could be put to great advantage by the clever businessman. This, of course, is where the difficulties begin, since although the corporate tax system is completely open and clear, acquiring an EU tax number in Malta poses particular problems, taking a great deal of time and patience, with no guarantee that it will be issued at all. In many cases, opening a bank account can prove even more of a test, often ending in failure.

On occasion, the failure can also be blamed on the client, who may not always provide sufficiently complete responses to the bank’s requests. The real reason, however, is that the Maltese banks are simply not interested in taking on new clients, or are unable to decide themselves what the criteria for judging new account applications should be. In the latter case, too, the essence is basically the same: wherever possible reject applications for the opening of accounts by foreign clients.

The icing on the cake for me was the Maltese bank which placed the following four requirements on the opening of accounts:

  1. the company must be registered in Malta
  2. the company must have a real office in Malta (substance)
  3. the company must carry out its business activities in Malta
  4. the company’s beneficial owners must be resident in Malta

From these criteria, it is quite clear that I, as a non-Maltese resident EU citizen will not be using this bank account to purchase wine from Portugal which I will then sell in the UK. Back in the days when I was a student of economics, they explained comparative advantage as follows: sheep are raised in the UK because the climate is suitable and the grass is green as a result of all the rain, while the Portuguese grow grapes, which is more suitable because of all the sunshine. The two countries then exchange wine and sheep, and everyone is happy. Eureka, here is the solution! We leave the banks out of the equation, and everyone starts bartering; a truly 21st century solution, and if we go a little further south, then we might even be able to exchange our sheep for brides!

The whole thing sounds a bit tragi-comic, but that’s the way it is. We have already had similar experiences with a number of banks. It seems to point quite clearly to the fact that in the future the banks are only going to allow those structures where the company and the bank are in the same country. Cypriot company – Cypriot bank, Hong Kong company – Hong Kong bank, Emirati company – Emirati bank, Bulgarian company – Bulgarian bank, Liechtenstein company – Liechtenstein bank. Why have I given such a detailed list? The traditional offshore jurisdictions, such as Panama, Belize, British Virgin Islands, Seychelles, Marshall Islands etc. either do not have the necessary banking infrastructure, or do not open accounts for locally registered companies. If the banks start to enforce the principle outlined above, then these countries, slowly but surely, will be consigned to the scrapheap.

Naturally, the banks have completely overreacted to the whole situation. If and when the exchange of information begins in 2017, everything will be transparent, so what exactly are the banks afraid of? They report everything to the country in which the beneficial owner is resident, or from which the country in managed, and their job is done. Any taxation requirements have to be arranged by the individuals operating the company. If they have omitted to do something, then the local authorities will instigate proceedings against them. Why then, under these circumstances, do the banks feel compelled to act as prosecutor? Isn’t it enough that they have already been the informant?

Of course, there is a huge question mark over whether the whole thing will start in 2017, or whether we will be left with a half-baked plan covering half the world. My reasoning behind this thought can be split into two groups.

  1. the differences between countries, differing interests and regulations, and the execution of the formal rules.
  2. the solutions and methods developed by the inspectors.

The reasons behind my skepticism regarding the first group can be traced back to the differences between countries. Although numerous countries have signed up to the Tax Information Exchange Agreements, it is still not all of them. Take Africa for example; almost an entire continent has been left out. Barclays bank is present in Ghana, so if this doesn’t apply to them, why not take our money there? Going by this logic, then until every country in the world signs up, there will always be a gap in the system, a loophole.

But is it really feasible that everybody will exchange information with everybody else? Are Israel and Pakistan really likely to swap information, when they don’t even recognise each other’s existence? Or can we really expect the Americans or even the British to hand over to the Russian authorities the details of the accounts held there by Russian oligarchs? These regulations all look very good on paper, but at the end of the day they are only worth as much as they achieve.

Here too, in the field of implementation, countries can be divided into two distinct groups: those which have Controlled Foreign Company (CFC) legislation, and those which don’t. In this respect, there is division even within the European Union. Almost all of the developed countries have such legislation, while a significant number of those which joined later do not. Beneficial owners of foreign bank accounts who are citizens of countries without such legislation are at an advantage over their counterparts in countries with CFC legislation. The „withouts” can hold funds far more freely in foreign company accounts, as they are subject to far fewer consequences taxwise.

Cikkünk az offshore bankolás jövőbeni tendenciáit elemzi.This is where the second element behind my doubt comes in, and that is the reactions. The market has already started working on solutions which will completely nullify the effects of the OECD directive. The use of nominee beneficial owners has already started, and providers are slowly but surely pricing the services, which we will be able to find on the internet before long. I personally have seen exactly this kind of document drafted by very serious law firms. However, there are still very big question marks over the legality and legal validity of such arrangements.

Of course, this could be seen as a message to the bureaucrats at the OECD: the more they try to regulate, the more aggressive and dangerous the reaction. They set their sights on cash transactions, as one of the main tools of the money launderers. And what happened? A significant part of financial crime now goes through the internet. The amount lost to card theft and fraud reaches billions of dollars per year. I was amazed to read recently that a reward of 5 million dollars was being offered for a hacker in the US. A tidy little sum! Not all that long ago, that was the amount being offered for the leader of Al-Qaeda. If we had stuck with cash, then bank robbers might only get away with that amount in a whole year.

I have no doubt that the use of nominee beneficial owners will see the start of an even darker period and will be accompanied by a whole list of criminal activity for the world to face. Here, when the judge has had his final say and the dispute rages on, the Kalashnikovs start to speak. It’s sad, but that’s the way it is. In a globalised world, where global scale transactions are commonplace between countries and continents, they are trying to chain us and our banking affairs to the country in which we reside, deprived of the financial freedom which should naturally accompany worldwide globalisation. This occupies a lot of my thoughts, for the time being, at least, without making me think about conspiracy theories. Or could it just be that everything going on in the financial world all around us only appears absurd and illogical to me?

Enjoy your read and the thoughts it provokes!

With warmest regards

László Váradi
Managing Director