THE OFFSHORE Island Review, chaired by a retired Treasury civil servant Andrew Edwards, was published in November 1998. Despite a diplomatic gesture in referring to the UK offshore islands as being in the “premier division of offshore centres”, it contained severe criticism of many aspects pertaining to banking and investment operations in Jersey, Guernsey and the Isle of Man (the ‘Islands’).
The British Government commissioned the Review, also known as The Edwards Report, following concerns over banking secrecy in Offshore Financial Centres (OFCs). In particular, it was responding to alleged poor enforcement of financial regulations and poor co-operation with other jurisdictions. The Review has since spurred a major pursuit of fraud and tax evasion which was reported to be a significant part of the financial activities taking place in the Islands.
The Edwards Report was history in the making and arguably the beginning of the end for illegal non declaration of tax. It has now gathered such tremendous momentum, that it has escalated into a worldwide witch-hunt on money launderers and tax evaders. If you are guilty of non declaration of tax, or have simply ‘forgotten’ to add something to your tax return, beware!
The Islands felt vindicated when the Review was published, as Edwards rejected many of the criticisms that had been made. He reported that the Islands were in the top division of Offshore Centres and that their judicial and prosecution systems, regulation and co-operation with other jurisdictions were remarkably good for such small communities. Edwards added that the Islands gave exemplary assistance in many cases of drug trafficking, fraud, tax offences and money laundering.
However, while having praise for the way the Islands conducted their financial business and saying that most of the Islands’ business was perfectly legal, the Review concluded that the extent of disreputable business was hard to judge and that there was a significant amount of tax evasion in the Islands.
A raft of recommendations was laid down, most of which, if implemented, would help enhance the Islands’ status. One of the improvements suggested by the Review was the introduction of a specialist financial crime unit to investigate suspicions of illegal financial and tax activity.
As wide ranging as the recommendations were, it was felt that the existing benefits of OFCs’ would cease to exist due to such tough regulations. The Islands did not want to put their financial industries at risk of being uncompetitive and lose business to other jurisdictions. In wanting a well regulated industry they also wanted a level playing field where all OFCs worldwide adhered to the same rules.
The Edwards Report was not alone in instigating investigations into crime within the financial world. In the same year as the Review, the Organisation for Economic Co-operation and Development (OECD) published a report on harmful tax practices being carried out by OFCs. The OECD produced a list of jurisdictions it considered to be tax havens and sought commitments from those jurisdictions to stop any activity the OECD considered was harmful. It also threatened sanctions if they did not comply with the OECD’s demands for reform.
Eventually, most of the jurisdictions made the necessary commitments to improve the transparency of their tax and regulatory systems and establish effective exchange of information for tax matters with other OECD countries. It meant that OFCs must provide answers upon request in the investigation and prosecution of criminal tax matters. This includes bank information, financial information and information on account holders and investments belonging to non residents. The OECD has now set its sights further and is extending its investigation to the Middle East and Asia.
Now the EU Savings Tax Directive has come into force resulting in an automatic exchange of information between EU Member States where an individual resides for tax purposes in a Member State different to where interest on savings payments are made. In order to retain banking secrecy and remain competitive, three Member States as well as eight other European countries will levy a withholding tax instead, but for a transitional period only. There will be no escape, no hiding! Non declaration of tax is a crime soon to be exterminated. One way left to mitigate or possibly eliminate tax altogether on your investments, is to do so through approved financial structures and legitimate tax planning.
The drive to eliminate tax evasion is moving in all directions. A UK law now in force stipulates that financial advisers, accountants, bank employees and solicitors have to report suspicion of tax evasion or risk imprisonment. They are not allowed to discuss it with you and so you could be under scrutiny this very minute and not realise it. Plus the Offshore Fraud Projects Team set up by HM Revenue and Customs is going on the offensive in a massive crackdown on offshore tax evaders. A staggering 155 million pounds sterling has been allocated to tax inspectors to comb through tax histories. The moral of this story is to deal with your financial investments now, before you live to regret it. As Andrew Edwards once told me, “tax evasion by virtue of non disclosure is no longer virtually risk free”, I would now go further and say that it is a very dangerous practice, now classified as money laundering and a criminal offence in most jurisdictions.
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