Big Brother is Watching

In recent years there has been increased emphasis of the need for financial service providers to "Know Your Customer". This has come to refer the need to obtain satisfactory proof of identity and address documents and to take up references and may in some cases have obscured the necessity for such persons to have a greater in depth knowledge of their clients, their assets and their activities. Why, you may ask? One reason is that such knowledge is invaluable in ensuring that any advice given is appropriate to the circumstances and another that the advisor is increasingly at risk of prosecution if the tax authority already has information relating to a possible fraud and which the advisor might be expected to discover if it is conducted thorough due diligence.
In the U.K. the tax authorities take the view that offshore structures present a major risk of serious fraud and devote considerable resources to uncovering such arrangements and adopt an increasingly robust approach to existing reporting requirements. We outline some of their methods in this article and although reference is to the U.K. this is a subject, which is equally relevant to other countries, which also adopt sophisticated methods and allocate extensive resources for the same purpose.
Undisclosed offshore banking accounts
The Offshore Fraud Projects Team (OFPT) is seeking information from financial advisors about their customers and the movement of funds offshore. In particular, it is asking banks for information in respect of customers' for whom they have moved funds offshore using third parties or suspense accounts, thereby bypassing the customers' own accounts.
The OFPT is also writing to taxpayers whom it has reason to suspect have offshore banking accounts, enquiring why there is no tax liability in respect of those accounts. The holding of such accounts is not itself evidence of fraud but in the absence of a prompt reply, a formal investigation may be opened.
Offshore credit and debit cards
Following the example of the U.S. Internal Revenue Service, the tax authority is establishing a project to identify taxpayers who have credit cards or debit cards issued by offshore banks, investigating the use of those cards in the U.K. and obtaining information directly from the credit card companies.
Once again, possession of a card such as these is not evidence of fraud, but it is another way of obtaining additional information. Persons who are resident in the U.K. but not domiciled there, will need to be extra vigilant and ensure that use, in the U.K., of cards issued offshore does not inadvertently constitute a remittance for income tax or capital gains tax purposes.
European Saving Tax Directive
The Directive requires paying agents (banks etc.) to report any savings income they pay to individuals resident in a prescribed territory. Prescribed territories are the 25 EU member states, Aruba, British Virgin Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Montserrat and the Netherlands Antilles. Paying agents in these territories make similar reports thereby establishing a network for the exchange of information.
Existing reporting arrangements
These are under close scrutiny. The objective is to identify unreported offshore structures, how they were funded and where their income arises and to check whether taxpayers have failed to report and pay tax on income or capital distributions.
There is an obligation on any person resident in the U.K. (other than a barrister), who in the course of a trade or profession has been concerned with the making of a settlement by a U.K. domiciled settlor, where the trustees are non-resident, to provide details to the Revenue. The report must be made within three months. We understand that the words "concerned with" are being widely interpreted to include persons through whom funds are remitted, which would include banks and professional firms.
We also understand that the Revenue have been writing to U.K. parent companies to enquire whether their offshore subsidiaries have made these returns and that a number of non-U.K. financial institutions have provided information leading to the discovery of previously unreported trusts.
Where the Revenue has been unsuccessful in obtaining information from non-resident trustees, it will generally put pressure, under threat of penalties, upon U.K. resident settlors and beneficiaries, even though these persons may have no power to compel provision of the information.
Other sources of information
The Revenue has power to obtain information from third parties and of course from the targeted taxpayer.
The Centre for Revenue Intelligence holds an extensive database, including the registration of aircraft, yachts and motor vehicles and on gold and silver and car valuations, bank, building society and mortgage interest and property transactions
Finally, or perhaps not, information is gathered from informers, information exchange agreements, double taxation treaties and surveillance operations.
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