Mishcon Deals - Issue 5

Recently, the Financial Times ran a story about British investors being asked to close their accounts in Lichtenstein. "Thousands of British investors with up to £3bn stashed in secret Liechtenstein bank accounts will be asked to come forward voluntarily under a deal to be negotiated next week that could be the first of many worldwide."

"Lichtenstein banks would be asked to shut down the accounts of customers who do not take up the Revenue offer and one of the big four accountancy firms would be asked to verify that the undeclared accounts had been purged."

"Lawyers said the Liechtenstein plan (the "Plan"), discussed behind closed doors with the Paris-based Organisation for Economic Co-operation and Development ("OECD"), could serve as an international model for other tax havens seeking to avoid an OECD blacklist." (Financial Times, 27.03.09, click here for full article).

If this is the future model for other tax havens, is it time to close all offshore bank accounts and does it mean the end for offshore private banking. As usual, the devil will be in the detail.

The effectiveness of the Plan will directly reflect the Lichtenstein authority's attempts to prevent an OECD black-listing and the preservation of its banking system. In addition, the extent to which Lichtenstein accepts the obligations of closing bank accounts will set the bar for what other offshore jurisdictions will be forced to accept if they wish to stay off the OECD black-list.

If previously signed exchanges of information agreements are any measure of the effectiveness of the Plan between Lichtenstein and the OECD, its impact on reducing the use of offshore private bank accounts will be negligible. Historically, offshore tax havens have agreed to release information about beneficiaries who, the onshore authorities can show, have committed tax related offences in their home country. This usually means a conviction which in itself has proved difficult as the necessary information was often in offshore jurisdictions, and the process inevitably lengthy. The terms of these agreements also prevented fishing expeditions by onshore authorities hoping to catch citizens that failed to pay tax.

It has been suggested that in terms of the Plan, Lichtenstein will appoint one of the "big four" accountancy firms to verify that the undeclared bank accounts have been purged. Once again, it will depend on the details, but an independent body reviewing the work will this gives the Plan greater credibility and a greater impact.

It is intended that the Plan will oblige Lichtenstein to close the bank accounts of British investors who do not accept the Revenue's offer. While this depends on the definition of a British investor, most investors who have money in offshore jurisdictions (or at least the high net worth individuals) do not have bank accounts in their own name. Rather, the account would be in the name of an offshore company or trust that would be used as part of an estate planning structure. If Lichtenstein authorities intend to apply the rules solely to bank accounts held by British investors, it will exclude the majority of bank accounts, at least by value.

However, whether it is British investors or the structures they use, the greater concern is that the Liechtenstein authorities intend agreeing, in the Plan, to proactively shut down the accounts of customers who have not voluntarily accepted the Revenue's offer. This would effectively make the Liechtenstein authorities an enforcement agency of the Revenue which would mark a very different relationship between onshore and offshore jurisdictions. More worrying is that other offshore jurisdictions will not be allowed to negotiate lesser obligations, and the establishment of this new onshore-offshore relationship may very well jeopardise the future of offshore private bank accounts.

Britons with offshore bank accounts will need to keep a close eye on the negotiations and resulting terms of the Plan. If the Plan contains the terms discussed above, accepting the Revenue's offer will be a lot more attractive, and less costly, than waiting for the Lichtenstein authorities to close your bank account.

Is it time to close your offshore bank account?