The optimistic view of tax evasion scandals that have bedeviled banks since 2008 is that they can only be seen in the rearview mirror. The incriminating files in the latest case, regarding tax-dodging personal accounts held at the Swiss arm of HSBC, date from 2005-07.
Since then, governments have embraced the idea of exchanging tax information on an automatic basis. The emerging global standard — the OECD's Common Reporting Standard (CRS) — sounds the death knell for bank secrecy, or so campaigners hope.
The optimists are right, up to a point. A tax transparency revolution is underway, the result of America's Foreign Account Tax Compliance Act of 2010. But wherever there is a financial crackdown, there are also enterprising moneymen looking to exploit remaining loopholes or to create new ones. One way they are doing this is by cloaking bank accounts in other financial products, such as insurance and pensions.
Workarounds evolve
Some insurers have approached banks, offering to "wrap" batches of undeclared accounts and investments in such insurance, thereby providing an extra layer of protection from prying eyes. As a result, America, Italy and others have been investigating products like "private placement life insurance," which combines an investment portfolio with gold-plated life cover for rich clients.
As scrutiny increases and the CRS moves closer to reality — implementation is set to begin in 2016 — these workarounds are evolving. Under the new standard, insurance wrappers will have to be reported if they have a "cash value" to the holder (if, say, he or she can withdraw funds from the policy or pledge it as collateral). So financial engineers have turned their attention to a version that does not have to be disclosed: "irrevocable" life insurance.
This works as follows. The client pays a premium to a newly created offshore company. The assets are legally owned not by the client but by the company. This in turn is owned by the insurer, which extracts quarterly fees. The client cannot take cash out directly or use the policy as security, so it has no cash value. But he can enjoy its fruits since he can have full use of any yacht, house or other asset bought by the company. He can even be the portfolio's investment manager. If investigators start snooping around, they will find a company that is owned by a licensed insurer, not a tax-evading plutocrat.
The world's largest insurers are unlikely to hawk such products, given the reputational risks. Smaller, offshore providers will be more tempted. A consultant says he knows of at least two such insurers that have recently approached banks, offering to wrap batches of tax-dodging accounts. One of them was only interested in doing bundles of $1 billion or more, he says, suggesting this is "potentially very big."
Turning in rivals
Closing this loophole would require making all insurance reportable, not just policies with a cash value. That might seem straightforward, but moving the CRS forward can be like herding cats: There are 93 countries in the project, all at different stages of ratifying the existing blueprint.
