How to protect your personal data with foreign banks in the era of automatic exchange of information under the CRS
Aleksei Andrievskii, Director at Andrievskiy Capital Group
Kyril Shein, partner at Andrievskiy Capital Group
Despite the excellent financial and tax preparation of responsible citizens, we will go through the basics of this innovation so that it doesn’t work like Vanity in Mikhail Zoshchenko’s story. Remember how one gentleman, having noticed a beautiful girl reading a book written in French in the park, nervously smoking six cigarettes in a row, asked her in French: “’…your reading looks so interesting… Let me know what kind of a novel it is.’ The girl turns around, raises her beautiful blue eyes at me and smiles, bewildered. The poor thing she doesn’t understand a word in French.”
The Standard for Automatic Exchange of Financial Account Information in Tax Matters is a model document developed by the OECD that provides for the annual automatic exchange of information between participating member states.
The standard describes exactly what information is subject to international exchange, indicates which financial institutions should collect and provide tax-relevant information to authorities for subsequent international exchange, describes the types of accounts and tax status of residents by which such information should be collected and provided, and also unifies methods for checking customer trustworthiness when opening accounts.
From a legal point of view, the Common Reporting Standard (CRS) is not a rule of law and in itself is not legally binding – it provides guidelines on which to rely. In order for it to become mandatory, the state must implement the relevant standards in its own legislation.
More than 100 countries have already joined the Automatic Exchange of Information (AEOI), and the number of participants is gradually growing, capturing more and more countries and jurisdictions. Even those countries that until recently were considered opponents of mandatory implementation are now on the list.
What seemed impossible in 2013 now looks very real, and the level of transparency required is very high.
This is a new reality that you need to consider when managing your financial planning.
Despite the fact that much in the way of business transactions has come out of the shadows, preferring to have ‘white’ incomes rather than ‘black’, this does not at all mean that you have to pay high tax rates or abandon the business.
Offshore companies, banks, experienced consultants and others today offer favourable and legitimate conditions for doing business and owning property while minimizing taxes and protecting your personal data held by foreign banks.
If much has already been said about the automatic exchange of CRS, then practically nothing is said about the reverse side of the coin – about the risks associated with the leakage of customers’ personal data from foreign banks when such an exchange is introduced, and the negative consequences this may lead to.
Risks of losing personal data with the introduction of CRS
On 23 November 2018, the Reuters news agency published an article: “Russia, stung by leaks of information, plans to tighten data protection.”
“Russia has an active black market in illegal databases compiled using confidential information stolen from state-run registries,” the agency wrote. “The data includes passport details, addresses, car registrations, flight manifests and even tax returns.”
That is, if your bank is in a different jurisdiction, then there is always the danger that the data on your accounts will fall into the hands of criminal elements or will be sold on the dark web. As long as there is a ‘bridge’ of information exchange relating to CRS between different jurisdictions, then such a risk will always exist.
Of course, the protection of the personal data of individuals is the most important decision, which, in my opinion, should be instigated as soon as possible. And the OECD should take responsibility for it; with the same zeal with which it made all members of its club “efficiently” exchange this personal information.
And yet, how to protect the data held by foreign banks about your savings?
How to protect your personal data in foreign banks
The only and most reliable protection against the leakage of your personal data may be a solution that will not require the exchange of such information. At the same time, your money can continue to work on world stock markets, and you can still receive investment income and declare it at a zero tax rate.
This can be achieved provided that both your personal bank accounts and the bank accounts of companies controlled by you are in the same jurisdiction in which you are a tax resident. In this case, all the data remains inside one country and the exchange, according to the principles of CRS, simply does not occur.
Which jurisdiction is optimal? Kyril Shein, partner at Andrievskiy Capital Group, an international lawyer included in the Legal-500 ranking of the top-100 corporate lawyers in Cyprus and Greece, discusses this.
Choosing the optimal jurisdiction for holding assets
Not so long ago, Cyprus was a universal jurisdiction for the ownership of assets, regardless of their type and value. The cost of owning a Cyprus-based company was low, tax rates were low, and banks were reliable and friendly. A successful addition was the opportunity to obtain citizenship under the “citizenship by investment” programme. However, in 2013 the situation changed for the worse.
Requirements for substitution and the actual presence in the country of incorporation force us to open physical offices of holding companies with real staff, and the cost of maintaining such an office can reach hundreds of thousands of euros per year, which is affordable only for those on the Forbes rich list.
Over the past five to six years, Cypriot banks have ceased to be both reliable (remember the 2013 haircut) and friendly. As a result of tightening compliance at the request of the United States and the European Union, and the struggle of the Cypriot Central Bank with ‘dummy companies, more than 20,000 corporate accounts were closed by Cypriot banks. It is now easier for Cypriot banks not to have a client than to have one. And customers have to meet increasingly stringent (and often unreasonable) requirements, report for each transaction and, despite this, they regularly face refusals to make or receive payments. Due to the need to maintain an extensive staff of compliance specialists, the cost of banking services has also increased significantly.
The foggy future of the Cyprus Investment Programme and possible negative consequences for Cyprus
As you know, the Cyprus Investment Programme (citizenship in exchange for investments) has been increasingly criticized recently by the European Union. The Cypriot government responded with small (and until recently, mainly cosmetic) changes to the terms of the programme. However, after it became known about the issuance of Cypriot passports to senior members of the governments of Cambodia and Saudi Arabia, as well as a fugitive businessman from Malaysia, against whom the United States imposed sanctions, the case took a very nasty turn.
The Ministry of Interior of Cyprus, with the involvement of specially selected American companies, will review the already reviewed applications with the possibility of recalling previously issued passports. Moreover, the cancellation of citizenship will occur not by court order, but by order of the minister. Obviously, in the near future we will learn about the withdrawal of Cypriot passports from a number of very famous people. In addition, many of the applicants, whose cases are still pending, have received letters in the last two to three weeks informing them that the Ministry “Can no longer consider their application.” In fact, this is an invitation for individuals to withdraw their application in order to avoid an official denial of citizenship (which would make it impossible to submit another application for citizenship in Cyprus or in another EU country).
Obviously, the requirements for participants of the Citizenship for Investment programme will be tightened more and more, the length of time for considering applications will increase, and the number of passports issued will decrease. We think that in the near future we can expect the termination of the programme. One can only guess what would happen to unsold real estate built specifically for passport investors. A crisis in the Cypriot real estate market, as has already happened, could lead to another banking crisis.
Also, it cannot be ruled out that after an audit of the passport programme, American compliance firms that have landed on the island will be tasked with verifying that the Cypriot banks are fulfilling the recommendations of the US Treasury in terms of getting rid of “dirty Russian money.” After resolving these burning issues, the EU can return to the issue of the tax regime of Cyprus, which, against the background of the most irritating passport programme, has been placed on the back-burner. An additional argument in favour of increasing the tax burden may be the internal need to replace the lost income from the passport programme, as well as the need for another rescue of Cypriot developers or banks.
Where is the way out?
Relative to the risks above, the choice of jurisdiction for the ownership of assets must be approached very carefully, and Cyprus is no longer the universal solution. In our opinion, Cyprus remains a very attractive jurisdiction to host investment holding companies. However, It must be borne in mind that, in view of the need to establish a presence in Cyprus by opening a physical office, the cost of maintaining such companies can reach hundreds of thousands of euros per year. What to do if such expenses are not justified? Indeed, the return of assets to Russia within the framework of the “amnesty” of capital, as the recent case using the data of the FSB special declaration in the framework of the criminal case shows, is far from the best idea.
It is time to seek new opportunities and to open new horizons. After spending considerable time exploring the tax regimes of reliable European states, we have developed a product that combines high efficiency and a reasonable cost of service. We propose the creation of an investment fund in accordance with the laws of Andorra. The fund is managed by a licensed manager, which facilitates the passage of compliance checks in European banks. The fund ensures confidential ownership of assets, since information about the beneficiaries is not publicly disclosed. Provided that the beneficiary obtains tax residency in Andorra, the effective tax rate can be 0%, while the presence of an Andorran residence permit allows visa-free entry into Spain and France. Over the years of working with us, Andorran banks have established themselves as being reliable and open to a constructive approach to work.
The absence of an Andorran citizenship for investment programme gives the investor the opportunity, if necessary, to take advantage of similar programmes in other states. In addition to the very attractive offers of Cyprus, Malta and the Caribbean, we recommend taking a closer look at the programme launched in Montenegro at the end of 2018. Citizenship of this country, which is the closest candidate for European Union membership, can be obtained with an irrevocable investment of €100,000 in a state development fund and with the acquisition of real estate worth from €250,000 or €450,000 (depending on the region of the country). It is also interesting to wait for the announcement of the conditions of the Greek investment programme, which will be launched in the first half of 2020. According to our information, the conditions will be very attractive.
How can we be of service?
Given the constant changes in the regulatory environment, it is necessary to periodically review the structure of ownership of assets in order to ensure its compliance with current legal requirements. Due to the introduction of CRS information exchange rules, legislation on the control of foreign companies, and requirements for an economic presence in the jurisdiction of incorporation of companies, the use of outdated solutions poses serious tax and administrative risks.
In this regard, we offer our clients an audit of the ownership structure of assets and – taking into account individual specifics – can develop optimal solutions for building a corporate structure.
We are also ready to advise our clients on various residency or citizenship programmes in Europe and other countries.
Director at Andrievskiy Capital Group
partner at Andrievskiy Capital Group
Andrievskiy Capital Group