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Wealth Industry Must Be Bolder, Better At Advocating Privacy Rights
29 October 2021
The wealth management sector must work better to show why the boundary between legitimate privacy and illegal activity matters, and be less reactive when problems hit, industry figures say. So far, political fallout from the Pandora Papers has been limited.
The latest data “leak” from – including details of 330 politicians’ financial affairs – throws more fuel on the fires of debate about respect for privacy. The Pandora Papers leak followed the Panama Papers and Paradise Papers revelations of recent years. (See related discussion here.)
The importance of financial privacy isn’t a big political issue – at least not when it appears that high net worth individuals, rather than the broader public, are in the potential net. However, that might change as central banks adopt digital currencies, for example, which might make it easier to track people's spending, saving and investing habits. Mainland China’s “social credit system” – granting or removing freedoms based on a score of how “well” a person behaves – could spread around other parts of the world. COVID-19 has seen governments require individuals to hand over health data in various track-and-trace programmes and through vaccination certificates held online.
How should the wealth industry address the aftermath of the Pandora Papers?
“The industry can do a better job of explaining the differences between privacy, legitimate tax efficiency, and unlawful tax evasion. The situation is better than five or 10 years ago,” Rob Rathmell, a lawyer at …. With the FinCEN files the whistleblower is now serving a prison sentence,” Woolley, who also spoke in this WEALTH TALK video, said.
Woolley’s FinCEN reference is to a former Financial Crimes Enforcement Network (FinCEN) official who provided 2,100 suspicious activity reports to BuzzFeed News - confidential banking documents that would form the basis of the explosive “FinCEN Files” investigation. She was sentenced to six months in prison. The person is Natalie Mayflower Sours Edwards, a former senior advisor at FinCEN. She was sentenced in early June this year.
This may be partly because there have been large leaks already and that some unacceptable forms of secrecy have gone, Rathmell said.
Switzerland’s bank secrecy laws no longer give foreigners the ability to stash wealth in the Alpine state; offshore centres such as the Cayman Islands, Jersey, Guernsey and Isle of Man, now provide public registers of beneficial ownership of companies. Scores of countries agree to transfer data to foil tax dodgers under a structure called the Common Reporting Standard (the US is not a signatory to this). The extra-territorial US tax code allows Uncle Sam to chase expat US citizens and Green Card holders to ensure that they obey tax filing requirements.
There is also a “let sleeping dogs lie” approach among IFCs and the industry when it comes to speaking out following a data dump, Rathmell said. “Offshore finance has been a bête noire…it is easy for politicians and others to make a quick hit.”
At present much of the financial services sector, including IFCs, prefer not to make vigorous protests about what has happened, thinking that they are in a no-win scenario, with the idea of avoiding giving oxygen to their adversaries, he said.
Walk the walk, not just talk the talk
A point in question is that when the European Union, or some other group, compiles a “grey” or “black” list of supposedly recalcitrant countries, it is still necessary for rules to be enforced on the ground, Fenergo’s Woolley said. “It is the professional service advisors that are advising on these structures, often for legitimate clients looking for tax efficiency, but this inevitably opens doors for criminals.”
Fenergo does not have a “tick-box” approach, she said. It is still necessary for advisors to make judgement calls, however much data they have, with necessary controls enabling better decision-making.
There is a lot of difference between treating a politically exposed person who has a 1 per cent stake in a corporate entity and one who has a 100 per cent stake. Some jurisdictions regard being a PEP as a permanent condition, even if the person has moved away from a position of public/political influence, she said.
“The big challenge is that what we do as an industry is too reactive…there will be a burst no doubt of regulatory activity after these Pandora papers but very little will change in the immediate or near future,” Woolley said.
Co-operation offers a way forward. Woolley mentioned the example of how, in the Netherlands, there are close relations between financial institutions and law enforcement, such as the police, enabling transactions to be tracked almost in real time. This does, of course, potentially compromise privacy unless safeguards apply. “There needs to be increased and improved partnership between stakeholders,” she added.
The wealth management sector must work better to show why the boundary between legitimate privacy and illegal activity matters, and be less reactive when problems hit, industry figures say.
So far, political fallout from the Pandora Papers has been limited.