December 22, 2016 12:00 pm JST

When the scrutiny gets tough, the rich get more sophisticated

Expect a more intense cat-and-mouse game over offshore wealth in 2017

JOYCE HO and MAYUKO TANI, Nikkei staff writers

HONG KONG/SINGAPORE There will be greater pressure for transparency on financial accounts -- and more cross-border sharing between tax authorities -- in 2017. So be ready for a new global cat-and-mouse game about who holds what offshore.

A new standard for the automatic exchange of information from financial institutions to governments about nonresident accounts is aimed at curbing the use of tax havens. Fiduciary services professionals contend their more sophisticated high-net-worth clients are unlikely to stop storing their fortunes offshore, despite attractive tax amnesties offered this year in places such as Indonesia and India.

Clients in Asia -- who are growing wealthier at a pace that outstrips other regions -- still fear instability at home more than financial regulators.

"They like the certainty, the political and financial stability, that these jurisdictions offer," said Chris Eaton, CEO of ILS World, an incorporation services provider based in the Isle of Man. Stricter annual filings will spur the best advisers to beef up compliance and find ways for clients to feel secure. Neither the rules nor the amnesty efforts will destroy the allure of Hong Kong, Singapore or any other financial center as a safe place for wealth, he said.

"They might be declaring their assets to their local governments for some time, but they are not going to stop using offshore structures," Eaton said.

GROWING CACHES The Organization for Economic Cooperation and Development devised the new common reporting standard with the Group of 20, against a backdrop of concern over the growth of illicit funds in offshore accounts. News reports on the "Panama Papers" -- the leaked files of Panama's Mossack Fonseca, one of the world's biggest offshore law firms -- turned the spotlight on cross-border finance.

The standard, now enforced by about 50 countries, requires financial institutions to report information on accounts held by nonresident individuals and entities, including trusts, to their home countries. Dozens more countries, including Asian financial centers, will enforce the standard next year and into 2018.

Wealth management companies in Asia are assessing all angles of the requirement, with good reason. Private wealth booked in offshore centers grew by roughly 3% on the year in 2015 to $9.8 trillion, a new Boston Consulting Group report shows. About 18% of that was in Hong Kong and Singapore. Switzerland remained dominant, holding about a quarter of the world's offshore assets, but the troves in Hong Kong and Singapore grew the fastest.

The report forecast that those two Asian cities would see 10% annual expansion through 2020 and hold a 23% share of global offshore wealth. The trend is mainly driven by entrepreneurs and businesses in emerging economies including China, India and Indonesia, said Tjun Tang, senior partner at Boston Consulting Group and an author of the report.

GAPING HOLE There are 101 jurisdictions committed to the OECD automatic exchange, but the U.S. has yet to join, creating a hole in the global effort. The U.S. enacted its Foreign Account Tax Compliance Act in 2010, which provides for stiff penalties on foreign banks that fail to disclose accounts of U.S. taxpayers. But U.S. information sharing is not reciprocal -- stirring criticism from transparency advocates.

The U.S. has been "very bad at getting information to flow in the other direction, to help foreign countries collect their taxes," said Nicholas Shaxson, who wrote "Treasure Islands," a book about the spread of offshore wealth. "So the U.S. has been a big tax haven."

Shaxson said he interviewed Donald Trump in July and the billionaire struggled to explain a strategy for resolving tax haven issues. "With Trump coming in, I think there will be a very low prospect of any constructive engagement for the United States," Shaxson said, noting he had two phone conversations with the president-elect. "I think that could be very damaging for the international system. It could be very helpful for rich people everywhere."

Pascal Saint-Amans, director of the OECD's Center for Tax Policy and Administration, told the Nikkei Asian Review that the success of the new regimen will be determined, in part, by how authorities follow up on so-called suspicious transaction reports. The OECD in September criticized the "lack of access, or restricted access, to STRs" among tax authorities. Access is "still not universally the norm," Saint-Amans said in an email.

"The playing field is pretty much leveled now, with so many jurisdictions committed to information sharing," he said. He added: "We don't think there are many loopholes. And if there are loopholes, it will be fixed. All this will have to be monitored."

More regulations have translated to more stringent client reviews by financial institutions and higher compliance costs. Some banks have chosen to exit the private banking and trust businesses entirely.

"A lot of banks here won't open an account for trusts," said Carolyn Butler, CEO of Hong Kong Trust Company. "Some won't open an account for foreign owners, for smaller accounts, or if there are offshore holding companies in the structure."

A Hong Kong-based managing director at an international trust company said some accounts are shut down on short notice when they are deemed "dormant."

A wave of consolidation is underway in the trust business, fueled by strong interest from private equity funds. For jurisdictions such as Hong Kong, where trusts are lightly regulated by a "best practices guideline" overseen by a trade group, there has been some re-domiciling.

Banks and financial managers call the shift in strategy "de-risking." Private intelligence provider LexisNexis Risk Solutions, in a September report, said such moves are making money harder to track. This could undo the rigors of the common reporting standard and "undermine anti-money laundering and counter-terrorist financing objectives." Governments will have to adjust yet again, as the hunt for hidden assets drags on.

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