In 2016, the Common Reporting Standard (CRS) was introduced. The times of bank secrecy were long gone, and now 2018 things are being taken a step further.

The automatic exchange of information involves global control and places each citizen under general suspicion. If for some reason you don´t trust that your assets are safe in the country where you live, you will fall into this exchange.

Anyway, you still have all the advantages of offshore banking, not because it helps you evade taxes, but because it allows you to better protect your money.

Getting back to the CRS, shortly after taking effect more than 35 ways to avoid what we´re going to discuss in a future article was discovered, so as you see, there´s really no need to panic. But before we get into that, lets first take a deeper look at what the exchange of automatic information means for citizens and our companies.

Which countries participate in the Common Reporting Standard (CRS)?

On October the 29th, 2014, fifty countries in Berlin ratified an international agreement to launch the global automatic exchange of account information to combat tax evasion, at the initiative of the OECD. The contractual documents to which I refer to in this article can be found here.

Naturally, this agreement strongly attacks tax havens. The best classic offshore destinations and international financial centres are already included. The only country that is both large and important and doesn´t participate is the USA, but they have the FATCA, their own mechanism to help control their citizens, and at the same time they also benefit enormously from their own offshore sector.

Aside from the standard information exchange there are only a few and unknown classic offshore jurisdictions: Bahrain, Nauru and Vanuatu. In addition to other less classical ones such as Lebanon, Gambia and Liberia. You have both here and here more up-to-date lists including the countries that have entered into or been left out of the CRS.

While most countries have entered into this exchange, the world is made up of 206 autonomous jurisdictions. Therefore, there are more than enough possibilities to keep your money in a country that doesn´t participate in the automatic exchange of information, or at least not yet.

Another thing is if you actually want to leave your money in a country like Syria, Lebanon, Cuba, Iraq or Liberia. Although you also have more stable options like Georgia, Paraguay or Botswana

How does the CRS work in theory?

The CRS is a framework contract between sovereign States. Its provisions are established in the legislation of the different signatory States. Therefore, there is no universally existing agreement between the signatory countries ensuring that they will actually exchange data with eachother automatically, regardless of the technical possibilities.

OECD regulations expected that the signatory countries must first enter into an individual bilateral CRS agreement. This is reminiscent of the procedure that is followed by double taxation agreements. No country is requiered to cooperate with all other countries. Switzerland, for example, has already announced that it would only exchange data with its most important trading partners.

But especially the strongest countries with high fiscal pressure, such as Germany or France, want to enter into data exchange agreements with all the participating countries in order to completely eliminate bank secrecy. Economically weaker countries would receive help for it´s adoption.

Let’s continue with an overview of the types of accounts and investments affected by the automatic exchange of information. Among them are:

  • Current accounts
  • Savings accounts
  • Deposits
  • Foundations and trusts accounts
  • Company accounts with predominantly passive income
  • Debt securities and obligations
  • Equity investments disguised as insurance

Accounts that, in the opinion of the OECD, represent a minor risk in terms of tax fraud are not affected. Among them are:

  • Private pension insurance
  • Life insurances
  • Retirement equity investments with tax advantages
  • Company accounts with active income

All the old accounts, those existing before 31.12.2015, and all the new accounts, open as of 01.01.2016, are included in the automatic exchange of information. Well, almost all…

The local legislator can exclude a maximum amount of $250,000 from the exchange of information to the accounts of existing companies.

And in practice, naturally, many of the local policymakers make the most of this opportunity. Otherwise, their banks would end up bleeding out. Therefore, anyone who opens a business account through a company will still have one month to put their money somewhere which is safe from the exchange of information.

This rule is perhaps the sifter ticket in the agreement. Since the approval of the automatic data exchange, tax fraudsters have had more than 15 months to put their money somewhere safe with the use of corporate structures. An opportunity that very few have surely missed.

Thus, as of the 01.01.2016, additional data registration provisions took effect to open accounts in the States that adopted the agreement early. Other countries (see table above) followed their lead in 2017 and will do so again in 2018. But there are still some legal ways to avoid their effects…

[By the way, the $250,000 rule for existing business accounts is repeated with each new country entry in the CRS, for 2016, 2017, 2018…]

How does the Information Exchange work in practice?

Now you might ask yourself, but how does it technically work?

Banks must implement the provisions once the legal framework has been agreed on. Thanks to the US FATCA program, there have already been first experiences in this respect. Thus, when the accounts are opened the beneficiaries account information has already been registered for several years.

The beneficiary is not necessarily the partner (this can be a fiduciary), in the case of a capital company. After all, the beneficiaries are all the natural/legal persons who receive the profits of a company. Now, with the CRS, you have to register all partners that have 25% or more shares in a company. This is naturally a great sifter of standard, because if a company is divided into five partners for example, the CRS loses its vigor.

But what kind of information is really transmitted? The bank automatically remits the following information to the tax authorities of the beneficiary’s country of residence at the end of each calendar year (normally in December):

  • Name
  • Address
  • Tax identification number
  • Date of birth
  • Account holder (for example, company name)
  • Account number
  • Account status
  • Sum of credits in account within the current calendar year
  • Sum of credits in account since account was opened

Of course, banks didn´t ask for all these relevant details until now. They certainly didn´t ask for their customers tax identification number before. This could change in the future.

Therefore, in all the accounts required to provide this information, the data stored in the bank regarding the beneficiary’s identity and address must be supervised and, if necessary, updated.

It depends on the place of residence of the account holder if their personal data is passed onto the authorities or not. If it´s a foreign State member of the agreement, the data is given to the authorities of that country.

However, as I previously mentioned, this exchange is often one-sided. Small tax havens sometimes don´t have the means (or grounds) to track their citizens. They only pass on information instead of receiving it, despite being part of the agreement.

In this case, a simple transfer of address is enough to stop the automatic exchange of information affecting us. Considering the other problems and repressions imposed by high-taxing countries, this isn´t a bad choice.

Of course it could occur to us to give a wrong or false address. Or open an account from a current address and then move. But the exchange of information isn´t so easy to deal with. If the address turns out to be wrong or outdated, the bank is required to search electronically for the following indications in its client’s data:

  • Identification as a citizen of a given country
  • Address or a countries PO Box
  • Address c / o in a specific country
  • Fiduciary
  • Telephone number
  • Outstanding purchase orders in a given country

While it´s necessary to inform customers of this, no warnings are issued. Normally, the bank only tells us if our data has been transmitted if we ask in writing.

For the more affluent of us, it´s important to keep in mind that, based on a million dollar account statement, the clients advisor must monitor the accounts manually and not only electronically for the six indications previously mentioned. The employee must find and complete the missing data for the informations transmission.

Therefore, anyone who still has an old account with little money and personal data will still be relatively safe if the electronic index finder fails to identify it.

But this will no longer be possible with newly opened accounts. From now on it will only be possible to open new accounts with even stricter customer identification procedures (KYC).

And this has been all. With this information you can think about how the CRS affects you. As you can see, banking secrecy has long gone. In a future article we´ll discuss ways to avoid the automatic exchange of data.

You can sign up to our list here to stay informed.