Private client: Pinpointing the problem

The political pressure for a crackdown on banking secrecy in tax havens has intensified enormously in recent months, a senior official at the Organisation for Economic Co-operation and Development (OECD) acknowledged at the Legal Week Private Client Forum last week.

Pascal Saint-Amans, head of the OECD's International Co-operation and Tax Competition Division, told delegates that the Liechtenstein scandal in February this year - which broke after the German government reportedly paid E5m (£4.2m) to an ex-employee of a bank for account holders' details, and subsequently recovered E110m (£92m) in back taxes from its residents - had resulted in a 'sea-change' in terms of the political attention paid to the organisation's work in this area. "From an OECD perspective, we can feel that change - it's really big," he added.

The UBS case in the US, where a senior bank executive has been accused by the Inland Revenue Service of helping US clients conceal $20bn (£13.4m) of assets in offshore accounts, has also turned up the heat.

Saint-Amans said it was essential to understand the perspective of the ministers championing the crackdown - such as Germany's finance minister Peer Steinbrueck and French finance minister Eric Woerth - who argue that secrecy laws in offshore financial centres infringe their sovereign right to assess their citizens' taxes and allow some of those residents to evade paying what is due.

The trillions of dollars being made available to bail out financial institutions is also a factor in the renewed interest in a crackdown on tax havens, Saint-Amans added. "It may be a bit populist to say so but that's what they [the ministers] have in mind and that's what they pressure us [at the OECD] to get, this information," he said. "Whether you like it or not, that's the political environment."

Following a request from the G8 at its summit in July, the OECD has been preparing a report on countries' implementation of its standards on transparency and effective exchange of information. The organisation is to release an interim report in 2009 and a full report in 2010 - both are expected to contain a list of tax havens and possible retaliation measures.

Saint-Amans admitted, however, that the OECD Secretariat was "surprised" at the strength of statements made by Steinbrueck at a conference on fighting against international tax evasion and avoidance held in October in Paris, where the German minister claimed that Switzerland should be put at the top of any blacklist. Steinbrueck also heavily criticised Hong Kong, Singapore and Luxembourg and suggested that he had "a carrot and a whip" [the German equivalent to a carrot and stick] to change countries' behaviour.

When it comes to using the 'whip', Saint-Amans said the OECD will be visiting Singapore shortly to tell the authorities there that certain countries would, as a defensive measure, consider renegotiating existing tax treaties unless they get agreement to the inclusion of the new Article 26 of the OECD Model Tax Convention, which covers bilateral exchange of information.

"It is a nuclear option because terminating the treaties is not something you like doing when you are a responsible state, but that's exactly what Steinbrueck, Woerth and other ministers have in mind," Saint-Amans said.

He added that the governments behind the Paris meeting were also prepared to offer the incentive of a double taxation treaty, as a carrot, to jurisdictions such as Hong Kong, where the government appears keen to move on transparency as long as there is a consensus among its business community. "If they move, they will get at least 12-15 [double taxation] treaties in the next two years," Saint-Amans said. "That is something that would improve considerably Hong Kong's competitiveness - at least that's the view of the government over there."

However, the approach taken by certain OECD countries was criticised by speakers at the conference, which was held at Villa D'Este on the banks of Lake Como in Italy.

"There is a tremendous inconsistency here in the whole programme," said Geoff Cook, chief executive of Jersey Finance, which represents the island's finance industry. "Certain OECD nations are happy to negotiate new double tax conventions with zero tax environments like the United Arab Emirates and others because they see it as in their interest, yet the whole platform of the programme has been driven forward - at least publicly - on principles [such as] the principle of transparency and the principle of good governance."

When it comes down to it, Cook said, principles seem to be abandoned and it becomes a question of horse-trading. "That does not feel a very comfortable place for a jurisdiction such as Jersey," he added. Larger OECD nations themselves are not acting on transparency either, Cook claimed, arguing that there is a degree of hypocrisy and blind spots. "The US is hiding behind the fact that Delaware is a state and not a sovereign nation and yet it is the largest harbourer of business where no-one has any idea who the owners of that business are," he said. Smaller centres are being stigmatised by the emotive language used by larger countries as well.

Cook also argued that agreeing to engage and co-operate - as Jersey and others have done - may well go unrewarded, citing Chancellor Alastair Darling's recent condemnation of the Isle of Man despite the island having signed a tax information agreement with the UK only four weeks previously. Jersey also faces the prospect of inclusion on a tax haven blacklist under the Stop Tax Havens Abuse Act in the US, despite having co-operated with the authorities there for two years, delivered information exchange and repatriated criminal monies in excess of $1m (£671,000).

Richard Hay, head of the London Private Capital Group at Stikeman Elliott, said he too was "very troubled by the fact that the OECD is quite conscious of dealing with care with geopolitically important actors", even though they might be small jurisdictions like Hong Kong and the oil-rich states. He said he was also concerned by the impotence of the OECD in applying its standards to its own members.

Hay warned that there was considerable public support for a "regulatory tsunami" in this area, and this had been given added impetus by the election in the US of a president more hostile to the offshore world than his predecessor. "We will see lots of new rules and, of course, they will be orchestrated by the dominant countries in the global economy," he predicted. "That poses some dangers and challenges for the smaller ones which do not influence that process very effectively."

Policy-makers invariably overlook the contribution of the smaller financial centres to the global economy, Hay added, with those in Europe, for example, attracting international capital to the Continent. "Policy-makers should be careful to ensure that they do not alienate [nearby] international financial centres," he suggested, pointing out that capital could be steered to other jurisdictions such as those in Asia and the Middle East.

Meanwhile, Charles Gothard, a private client partner at Speechly Bircham, told delegates that the attacks by national and supra-national tax authorities were a key reason - along with the growing competition between centres - for "quite a significant sense of insecurity" on the part of offshore jurisdictions. "There is also a sense of inevitability with the way the world is moving in terms of initiatives to combat terrorist funds being hidden away, initiatives being taken to combat tax evasion of whatever sort, and the global economic situation where governments are very short of revenue and looking for opportunities to raise more funds," he added. All these factors will contribute to the increasing pressure on offshore financial centres to toe the line, he said.

Gothard added that it was essential to distinguish between legitimate and illegitimate motivations for making use of secrecy laws. "The rights of the individual are hugely important," he said, citing the example of high net worth individuals who are concerned that information supplied to the government may fall into the wrong hands, exposing them and their families to kidnap risk.

Illegitimate use of secrecy exists where banks and trust companies are running non-tax compliant structures and "we all know that there are plenty of institutions that are still doing that", Gothard claimed. "What amazes me is that some of those institutions do not seem to have woken up to the way that the world is moving. They are on a hiding to nothing in believing that they will have a long-term sustainable business, running non-tax compliant structures."

Jonathan Burt of Barclays Wealth agreed that confidentiality remains an extremely important point for clients. "The primary drivers are legitimate concerns about privacy [and] personal security but there are also concerns in relation to confiscatory authorities and the perpetual fear of expropriation of assets," he said.

Whether the right balance will eventually be struck between individuals' right to privacy and the right of countries to collect the tax that their residents owe remains to be seen. One thing is clear, though - the political temperature is rising.

Pre-marital bliss

The law on pre-nuptial agreements in England and Wales is "a mess" but a planned Law Commission consultation paper on legislation in this area is likely to prove a missed opportunity, a leading London-based family lawyer told delegates.

Speaking at a session on the international differences in pre-marital agreements, Frances Hughes explained that such agreements are, strictly speaking, not legally enforceable under English law, but can be taken into account in a divorce.

Hughes, senior partner of niche firm Hughes Fowler Carruthers, said recent case law suggests that some judges - including Lord Justice Thorpe in the Court of Appeal - now consider that, in certain circumstances, pre-nuptial agreements should be given so much weight that they are virtually enforceable.

However, she warned that most of the marriage contracts that come before the English courts are not the sort of contracts that the judges would like to see. "They would like to see the sort of contract that a Green Paper recommended as long ago as 1998, where the parties have separate legal advice, where the needs of the children are taken into account, and where the contract is signed 21 days before the marriage," she said.

According to Hughes, there have been significant developments recently in case law - notably the Crossley case but also NG v KR, which involves a French husband, German wife and a German marriage contract and will be heard by the Court of Appeal in April 2009.

The Law Commission is also due to produce a consultation paper in 2012 that will look at possible legislation. Hughes feared that this may be "a missed opportunity" because of the likely conclusion that adoption of US-style pre-nuptials is the only way forward. "That means we are essentially pitted against much of the world, including the European Union, who do not think like that and do not see it as necessary," she said.

Hughes added the session speakers agreed that what was most desirable would be for each jurisdiction to have a pre-nuptial contract that would travel and be recognised in another jurisdiction. "Unfortunately, we are a long way from that," she admitted.

Reputational Risk

The developing case law on privacy in England and Wales does not mean the death knell of investigative journalism, top claimant lawyer Keith Schilling insisted at the conference.

Schilling - who has advised on some of the leading cases in this area, including those involving Jamie Theakston, Naomi Campbell and JK Rowling's son - said: "There is a balancing exercise between reputational rights and freedom of expression, but there is no public interest in publishing salacious photographs, in exposing sexual peccadilloes or infidelity, or photographing well-known figures going about their private affairs."

The senior partner of media litigation firm Schillings added: "If these people are engaged in serious criminal conduct, the balance may be different. But even conduct which justifies freedom of expression trumping privacy rights will not necessarily justify the publication of intrusive photographs."

Jennifer McDermott, a partner at Withers, explained that the over-arching system that melds the laws together is the European Convention on Human Rights, and articles eight (the right to respect for private and family life) and 10 (the right to freedom of expression) in particular.

"What has been established, certainly in the English courts, is that neither of these two articles take precedence," she said. "You have the intense scrutiny of the facts of the case to decide whether or not there has been a breach of privacy and whether you can get an injunction, or if you can't, what other relief may be available further down the line."

Pointing out the potential for immense damage to an individual's wealth and reputation, Schilling said the critical point with privacy laws is that they must be utilised quickly. "When I say quickly, we don't mean weeks or days but hours," he argued. "Our personal record in the office is getting an injunction within two hours of being notified of material which was about to be published."

Matthias Prinz, who has acted in groundbreaking cases in Germany such as those involving Karl Lagerfeld and Claudia Schiffer, agreed on the need to act fast in such situations.

Prinz, senior partner of Prinz Neidhardt Engelschall, added: "We also learned how important it is in cases involving internationally-known people to think internationally and to be aware that the violation of the rights of the client does not only appear in one home jurisdiction but - you can absolutely sure - in other jurisdictions as well, especially now with the internet."

The web has become hugely important, panellists agreed. "There are all sorts of ways that the internet can be influenced through legal action or legal pressure and very good reasons for doing so," Schilling said. "It used to be said that today's newspapers are tomorrow's fish and chip paper. That's no longer the case as today's newspapers will be available to our children or grandchildren in 20 years' time."