Automatic Exchange of Information : the Silver Bullet for Tax Evasion?

Inside the World's Tax Information Wars

Mar 31, 2024

"In recent years, under the impetus of the OECD, numerous agreements have been signed between countries to improve the exchange of information, including in tax matters. All this brouhaha only reflects their inability to solve the problem."

Renaud Van Ruymbek1 , former French anti-corruption judge

Note : After the 14-part series in which we looked at how nation-states are being disrupted by the Internet and globalization, and a 4-part series on why now is the worst time for them, I have concluded that there are two main ways for governments to respond to these disruptions:
Increasingly control what their residents do, via permanent digital surveillance and the use of AI and machine learning (China's way)
Accept that their role will diminish and treat their residents more like customers
In this new series, corresponding to chapter 4 of my forthcoming book, we analyze the (very) slippery slope towards generalized surveillance to which many countries, including the most democratic, are committing themselves.
The Temptation of Generalized Surveillance
The Good News about the Snowden Revelations
Mass surveillance programs in other democratic countries
To resist the power of the Ring is too difficult
The fight against terrorism: a good excuse or a legitimate reason?
Do You Have an Irrational Fear of Terrorism?
How Modern Tech Empowers Governments

The idea of automatically exchanging financial and tax information between countries emerged in the 2000s to combat international tax evasion and avoidance, and took shape after the 2008 crisis, when the G20 announced the "end of banking secrecy ".

In 2010, the OECD published the Common Reporting Standard (CRS), which defines the information to be exchanged automatically between countries.

Also known as the Automatic Exchange of Information, or AEI, this procedure enables tax authorities to automatically exchange banking and financial information concerning individuals or legal entities residing in another country.

Basically, the idea is that any significant bank or financial account held in country A by a person or company resident in country B will be communicated to the tax authorities in country B in the following way: financial institutions share the information with the tax authorities in their country (A), who then communicate it to those in country B.

From 2014, the first exchanges were launched between countries that had signed bilateral agreements based on the CRS. In 2017, more than 90 jurisdictions began automatic exchange between themselves.

This number is growing every year: by 2022, 152 countries were participating in the CRS2 .

The information exchanged is :

Name, address, taxpayer identification number (TIN), date and place of birth of each person to be declared.
Account number.
Name and identification number of reporting financial institution.
Account balance or value at the end of the calendar year in question (or any other appropriate reporting period) or at account closure, if the account has been closed.
Distributions made to the account (dividends, interest, gross income/redemptions, other).

This automatic exchange has been deployed by a large number of countries, representing a significant proportion of global GDP, in a very short space of time: it clearly represents a battle won by nation-states against one of the disruptions brought about by globalization and the Internet, namely the facilitation of fraud.

But this system is far from perfect: let's see why, and what the results are.

The results: is the CRS effective in combating tax fraud?

Several3 research4 have studied5 the results of AEI since its introduction.

Here are their conclusions:

The introduction of the CRS has reduced tax non-compliance at national level, but its effectiveness is diminishing in cross-border contexts due to difficulties in monitoring and sanctioning foreign organizations.

A lack of interest on the part of countries to rigorously apply this agreement

For example, German authorities can audit local companies, but not banks in Singapore. Financial centers abroad must ensure that financial institutions comply with the CRS, but the motivation of these regulators is often weak, as they have nothing to gain from applying these regulations, or applying them too severely.

Penalties for non-compliance vary widely between countries, and offshore banks may have no incentive to investigate complex financial structures, allowing sophisticated tax evasion to persist.

What's more, there's a "hypocrisy" at the heart of the AEI, stemming mainly from conflicts of interest between countries, which are trying to set up a system that applies to others, and not to them, in order to benefit from the billions that will move to them if they manage to maintain a certain opacity in their system, notably through a mere façade of compliance with the rules.

The USA, for example, does not participate in the AEI, and has its own mechanism, FATCA, which we have already discussed in detail. When FATCA was set up, the US promised reciprocity in the exchange of information, a promise that has never been kept. Ironically, this leaves the USA as one of the last old school tax havens, where you can still stash your money like it was in the 1990s (if you're not American).

Disruptive Horizons

The FATCA disaster

Note: Before starting, I'd like to make it clear that I'm not American, and am therefore not directly concerned by the fact that the US taxes its citizens wherever they live, nor by FATCA. I share the reasons that led me to make this analysis later in the article…

a year ago · 11 likes · 4 comments · Olivier Roland

But they're not the only ones: the bulk of the opaque mechanisms used are provided by the overseas territories of OECD countries, notably those of the UK and the Netherlands.

Facade legitimacy

In addition, tax havens hack the system by "cherry picking", i.e. choosing mainly partner jurisdictions that are themselves tax havens (and don't care about the information exchanged) for exchange agreements, in order to comply with the requirements of a minimum number of signed agreements, while avoiding establishing an exchange of information with more relevant partners.

They love to sign cooperation treaties with each other, which of course remain largely unused. This is one of the major trends in many jurisdictions: legitimacy for the sake of legitimacy.

On paper, all the regulatory requirements have been met.

In the field, these requirements are met in the least effective way possible, and/or with non-existent or lax controls and sanctions.

Many other loopholes

For example:

Some banks claim to comply with the rules, but don't, or not completely. And in some jurisdictions, they face little or no consequence for doing so.
- What's more, it's impossible for the authorities in, say, Spain, to ensure that Bank X in, say, Peru, is compliant: it's up to the Peruvian authorities to make sure, and they have, it must be said, no direct incentive to do so - it won't put a kopeck more into the state coffers, even though this control is financed by the state.
The CRS can be easily circumvented by acquiring a resident visa in a country where this is easy to do, and renting a cheap apartment, which will suffice to "prove" to a bank that you are a local resident. The information will then be sent to the wrong country (or even nowhere if the account is located in the same country of "true/false residence"), and not to the true country of tax residence.
All participating tax havens have jumped on the bandwagon by opting not to receive information via the CRS, and many of them facilitate residency visas which ensure that the banks used will not send account information anywhere.
Some wealthy individuals have set up "straw banks", where they are the only customers, and open an account with another, genuine bank. The CRS (and FATCA) do not oblige a bank to send account information from another bank. A certain Robert Brockman managed to conceal $2.7 billion in income from the US tax authorities using this method, and was only discovered thanks to a whistle-blower6 . He died at the age of 81 before he could stand trial.
When the CRS was introduced, a significant proportion of the money held in bank accounts in the form of cash or financial instruments was converted into real estate, the information on which is not transmitted via the CRS.
Generally speaking,7 research shows that tax evaders are adept at adapting to new international regulations, taking advantage of the slightest loophole, and that the CRS is no exception, casting doubt on its real results.

One of the research studies8 concludes as follows: "All these observations lead to the conclusion that these improvements in financial transparency have been superficial."

In the end

The CRS has certainly produced results, by putting a stop to old-school fraud: as I mentioned above, the days when you could quietly open a numbered account in Switzerland are definitely over. So it's fair to say that the nation-states have implemented an 80/20 strategy that has won them a battle.

However :

This won't stop serious fraudsters, given the many loopholes in the system.
This will encourage individuals who were previously able to commit fraud to leave their country of origin and take advantage of the booming market in jurisdictions fighting to welcome them.
This automatic exchange of information is a godsend for authoritarian governments, preventing activists from using foreign accounts. This enables their total financial surveillance (unless the activists know how to use cryptos well), further diminishing the prestige and legitimacy of democratic nation-states and showing the extent to which they must become a permanent surveillance society to combat these disruptions.

Coming soon

In the next article, we’ll take a look at how states are starting to use AI and machine learning to take their surveillance capabilities to the next level.

Stay tuned ! In the meantime, feel free to follow Disruptive Horizons on Twitter or Linkedin, and join the tribe of Intelligent Rebels by subscribing to the newsletter :