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Is Financial Privacy Dead?

Contributed by Equity Trust
14 September, 2015

A Brief Look at some New Zealand Structures in the Context of the OECD Common Reporting Standard


One of the most widely feted developments in the international fight against tax evasion is the OECD-promulgated Declaration on Automatic Exchange of Information in Tax Matters ("the Declaration"), which was signed in Paris on the 6th of May 2014.  The Declaration was initially adopted by 47 individual nations, and was signed by the European Union as a political bloc. Subsequently, another half a dozen or so nations around the World have ratified the Declaration.

For those of you who have been living in a cave over the last couple of years – or who may have been taking an extended sojourn on the island where Janis Joplin, Jim Morrison and Jimi Hendrix have reputedly been living since the early 1970s – implementation of the objectives of the Declaration has now reached a fairly advanced stage.

The OECD has disseminated the text of the Common Reporting Standard (CRS), which outlines in detail the proposed mechanics of automatic information exchange (AIE). In addition, the text of the Model Competent Authority Agreement (MCAA) has been promulgated, and provides the legal framework for the incorporation of international AIE obligations into the domestic legislation of signatory nations.

This new paradigm of international AIE in tax matters goes live for most jurisdictions in late 2017, with the remainder aiming for active implementation by early 2019 at the latest.

So, we are witnessing the dawn of a new age of international cooperation in fiscal affairs. Most see this as cause for great celebration, and a significant step on the road towards the emergence of global government. However, what if you are not so enthusiastic about this development? What can you do if you see this whole saga as more Orwellian than Kantian?

Canvassing the Options

In this article we briefly canvas some of the options available to you within the confines of the existing international financial architecture.

Of course, some of you may still choose to convert your wealth to tangible non-financial assets (and that may be a very sensible strategy to implement in a diversified portfolio, in regard to at least a part of your total holdings), thus avoiding the need for the intermediation of the financial institutions who are charged with implementing the new AIE standards.

Others may choose to establish footholds on emerging international Renminbi platforms, which may well, in time, provide an alternative to the current hegemony of US regulators backed by the ever-present threat of excommunication from the USD-denominated international payments system.

However, many will still want to enjoy the liquidity and security of traditional financial instruments traded on established markets, and good old-fashioned cash and its near equivalents.

Is this still feasible, with any degree of privacy whatsoever, in this new era? The good news is that a high degree of privacy can still be achieved, provided that careful planning is undertaken.

The first option is to hold assets through a private trust company (PTC) structure.

What is a PTC?

As most of you will know, a trust is not a legal entity in its own right. Like a contract, it is a legal relationship. The main player in this relationship is the trustee. The trustee is the legal owner of the assets that make up the trust fund, and makes the decisions in regard to the management of those assets, their investment, and the enjoyment of the economic benefits associated with them. 

The trustee does not have to be a physical person; it may be a body corporate, such as a company. Examples of professional trustee companies abound. In exchange for an annual fee, there are any number of companies around the World who will provide trustee services.

A PTC provides the same services as a professional trustee company, but it does so only in regard to one trust (or, sometimes, several trusts of a single client). PTCs are commonly owned by the client who establishes the trust ("the Settlor"), typically through an intermediate body corporate, or other legal entity. The board of directors of the PTC will also usually have the Settlor, or a trusted advisor or family member, as a sitting, albeit often non-executive, member.

What are the advantages of a PTC in the context of AIE?

The first thing to note is that professional trustee companies are considered to be financial institutions under the CRS. Therefore, they have the same reporting obligations as banks and other mainstream participants in the international financial system. In short, they are required to report the details of the trusts that they administer to their home country fiscal authorities, who then, in turn, pass those details on to the fiscal authorities of the various countries where the Settlor and the beneficiaries are resident for tax purposes.

Despite the elaborate promises of the OECD, and the extensive provisions in the CRS directed towards protecting privacy, tax authorities – internationally speaking – have proven to be about as watertight as a hedgehog's raincoat on occasion. So, trusts administered by professional trust companies are generally not going to be an option in situations where high levels of privacy are essential.

The PTC is not considered to be a financial institution for the purposes of the CRS, and so is not subject to reporting obligations. Why is this? Basically, it is because a PTC is not in business.

Professional trustee companies are in the business of providing trustee services. Since trustee services equate to holding financial assets for the account of others for the purposes of the CRS, professional trustee companies could – depending on the circumstances which prevail in the case – be considered to be one or more of a "Custodial Institution", "Depository Institution" or "Investment Entity". As a result, they are treated as financial institutions, with all the attendant reporting obligations.

PTCs, on the other hand, do not have a business. They act as trustee of at most a small number of trusts. They do not charge a fee. They do not have staff or offices. They do not advertise their services. They are not established with the purpose of making a profit. Hence, they cannot be captured in any of the three categories of financial institution defined in the CRS (namely – "Custodial Institution", "Depository Institution" or "Investment Entity"), and do not have reporting obligations.

What are the disadvantages of a PTC in the context of AIE?

Given that a PTC is a stand-alone entity, and is not part of a wider financial services business, it cannot offer the same degree of integration in the broader financial system as a trust administered by a professional trust company. Many professional trust companies are owned and operated by banks, and so can offer a host of other services, most importantly accounts for the holding of cash and other financial assets.

So, if you opt for a PTC structure, you are most likely going to have to deal with a separate financial institution in order to obtain an account in which to hold such assets. This involves going through elaborate KYC ("Know Your Client") checks, during which you will be required to disclose virtually everything, short of your blood type and inside leg measurement, about yourself. The financial institution in question will be particularly interested in verifying: the source of the funds to be held in the trust; your identity, and; the identity of the beneficiaries.

Does this negate the benefits of the PTC, by means of reintroducing, at the level of the bank or other financial institution, the reporting obligations which we had eliminated at the level of the trustee? With careful planning, the answer is 'no'.

There are two aspects to keep in mind here. Firstly, despite the much-publicised death of bank secrecy, there are still a number of jurisdictions which provide robust protections when it comes to the disclosure of financially sensitive information. The days of numbered accounts held in the name of shell companies owned by the holders of bearer shares are well and truly gone. However, a very high degree of privacy can still be achieved. Secondly, there are a number of unique features of the PTC structure itself which can be leveraged, in order to bolster the already considerable flexibility of a discretionary trust in safeguarding privacy. The exact details are beyond the scope of this introductory article. Needless to say, Equity Trustees International would be happy to speak with you further on this point.

Why choose a New Zealand PTC?

So, you've decided that a PTC structure is of interest. Why should you choose New Zealand over the many other jurisdictions that offer this structure?

The first point to keep in mind is that many of the jurisdictions that actively market PTCs are considered to be "offshore", and – justifiably or not – are red-flagged as tax havens by multilateral international institutions, such as the OECD, and powerful states, such as the UK and the US. The problem is primarily reputational; despite the considerable efforts made by these jurisdictions in recent times to implement international best-practice standards, they remain tainted by former indiscretions, and – almost invariably – structures domiciled in these jurisdictions draw an inordinate degree of scrutiny from regulators internationally.

New Zealand is considered to be an "onshore" jurisdiction. It routinely finishes in the top 5 of Transparency International's Corruption Perceptions Index as one of the least corrupt countries on the planet. New Zealand does not figure on the "blacklist" of any major fiscal authority internationally. New Zealand is the signatory of numerous Double Tax Treaties, and Tax Information Exchange Agreements. It is rated as compliant with international best-practice standards by the Financial Action Task Force, both with regard to the eradication of harmful tax practices, and money-laundering.

The second point is that New Zealand ticks a lot of additional boxes when it comes to selecting a jurisdiction in which to base your asset holding structure:

  • It is a modern parliamentary democracy, with a high degree of legal, political and economic stability.
  • It has a highly trained workforce with relatively low average rates of pay, especially when adjusted for the current weakness of the NZ dollar against major currencies.
  • It has highly developed telecommunications infrastructure, which helps to mitigate the natural disadvantage of its relatively inconvenient time zone (GMT +12).
  • Its trust and company law is highly evolved, and is firmly founded on English common-law principles.

What other options are available?

There are a number of other options available which provide for the protection of financial privacy. The most interesting of these are premised on the existence of a category of "Non-Reporting Financial Institutions" (NRFIs) under the CRS. As is suggested by their title, financial institutions which fall into this category are not required to share information in regard to the entities whose accounts they administer.  In very basic terms, the NRFIs in question all share a similar structure, consisting of a collective investment vehicle established under the auspices, or with the collaboration of a central bank or other governmental authority. Again, it is beyond the scope of this article to go into detail with regard to these structures. However, Equity Trustees International has developed relationships which allow it to broker the establishment of such structures for a highly select clientele.


So, in summary, we can see that, despite the fact that we are entering into an era of unprecedented collaboration between fiscal authorities at an international level, and in spite of the more or less moribund state of bank secrecy as an international phenomenon, there are still opportunities available to protect one's privacy within the financial realm. While it is true that tax evasion has become almost impossible in today's world of global AIE, there is still scope for the preservation of financial privacy. That scope is much reduced, due to the conflation of fiscally driven schemes designed to undermine the integrity of national tax bases, and privacy driven initiatives designed to protect the integrity of the individual. However, those who believe that it is important to render unto Caesar only that which is Caesar's, and see in AIE regimes the precursors of a Brave New World, will take solace in the fact that they are still afforded at least some modicum of refuge within Law's Empire.


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