A taxing debate

In the still shaky economic climate, the questions on the minds of Legal Week's Private Client Forum attendees focused on financial advice. Charlotte Edmond reports

When it comes to tax advice, lawyers frequently find themselves crossing with accountants and financial advisers. But when it comes to regulation, to what extent lawyers are treated as financial advisers is a key question.

Increasing levels of legislation - both that which has come about in the last year-and-a-half and that on the horizon - was at the front of advisers' minds at Legal Week's Private Client Forum, held last month in Italy.

"There is new legislation almost every place you look as various countries decide how they are going to try to come out of this financial crisis," said McDermott Will & Emery partner Henry Christensen, who chaired the conference.

He added: "We have had a continuing battle with the Organisation for Economic Co-operation and Development (OECD) and the EU, and in the US the USA Patriot Act, as to what extent lawyers are treated as financial advisers in terms of their duties in the anti-money laundering battle.

"In the US there is a question over whether we should require lawyers to advise when they know about large money transfers - not that there is anything wrong with them, just that they are taking place. The same issues exist in the EU as well."

Private client lawyers are keeping a keen eye on what the EU, the US and Asia are doing to increase their regulation of the financial industry. Christensen suggests that as well as the usual banks, insurance companies and investment advisers which would fall under this banner, the United States believes that regulation should now extend to family offices as well because they possess large enough holdings that they could impact the financial markets.

Secrecy

On the regulation front, the age-old battle surrounding secrecy has been given new life in the financial turmoil, with countries around the world keen to cut back on perceived tax leakage and boost their competitiveness.

Many delegates were in agreement that the days of secrecy were numbered and increasingly the major financial centres would be insisting on greater transparency. A major point of discussion was the recent dispute between the US authorities and UBS over disclosure, which has led many high-net worth individuals to question whether Switzerland remains the right place to hold their assets.

Christensen commented: "On the same day I will have a client call me and say: 'I have lost hope in all US financial advisers because they are much too aggressive and so I want to move my money to Switzerland'. And then I have a client call me and say: 'Well, with all of these problems with UBS and the internal revenue service, I've got to move my money out of Switzerland.' In many ways I believe the US and UK are the ultimate tax havens - after all, the US insists on complete disclosure of financial information of all accounts that US citizens have in Bermuda but it by no means insists on complete financial disclosure for all bank accounts that Mexicans have in Texas."

Tax evasion versus tax avoidance

Of course, one of the primary drivers behind governments pushing towards greater transparency is to cut back on tax evasion and avoidance, which many countries, in particular the US, have chosen to target as a means to gather recoup income to repay national deficit.

Jonathan Burt, managing director at Barclays Wealth, believes that the difference between jurisdictions with secrecy on the one hand and jurisdictions with anti-money laundering regulations on the other has never been more stark. It is clear that increasing disclosure laws, in addition to tax laws, will be playing an important role in financial planning for private client lawyers in the future.

He believes the US can learn from the UK and the EU where it has long since been the case that the lawyers are the gate-keepers with regards to tax evasion. If a tax evader sees a lawyer in the UK they must be reported, and as such he believes countries have hardly started in terms of tightening up these laws.

In reality, tightening regulations surrounding tax evasion equates to a clamp down by onshore communities on tax havens. But Geoff Cook, chief executive at Jersey Finance told delegates that Gordon Brown was looking in the wrong place if he expects targeting these financial centres to benefit the City and help raise more government funds.

Delegates also raised concerns about how advisers will draw the line between specific information asked legitimately of their clients by authorities because they suspected tax evasion and simple fishing expeditions.

The shift of power

But the driving force behind the aim to increase regulation is actually tax competition, Richard Hay, a principal at Stikeman Elliott, argued.

"We've had a significant change in control of the agenda," he said. "It's moved from the tax policy walks at the OECD into G20. And everything needs to be interpreted with this as the key marker. The OECD are responsive to logical argument... the G20 doesn't care about that. Logic doesn't matter to them - it's a nicety. Fairness doesn't matter to them. They operate at the last totally unregulated frontier of the world. It's just pure power.

"What we are talking about is control over the deployment of mobile capital in the global economy. And when you think about it, what is more important as an expression of sovereign power than to be able to control the allocation of development capital."

He added: "The biggest objector on the global scene to automatic information exchange is the US - it would be a complete nightmare for them because we all put money into the US, so for them to offer information to the whole world would be a commercial disaster and the OECD knows it. And they pay 23% of the OECD budget."

But despite uncertainty, leading tax and wealth advisers were upbeat about the coming months.

One delegate joked: "[As someone once told me,] the critical thing to do is always play by the rules, but there is an unexpected pot of gold at the end of these particular rules because when you have the consent from the Serious Organised Crime Agency (SOCA) to act, you could then defend the chap against subsequent criminal litigation and civil enquiries into his tax returns."

And as Hay summarised: "We are in complete chaos. It's a wonderful time for advisers."

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