Tax Information Exchange Agreements - Part 2: Tipping Off & TIEAs

Responding to a notice to provide information

1.      What happens once the authorities decide they will seek information requested by another country under a TIEA? The standard TIEA obliges each country to ensure that it has the authority to obtain and provide information held by banks, financial institutions and others (such as trustees), relating to the ownership of, or other involvement with (e.g. as settlor, trustee, protector or beneficiary in the case of a trust) entities or assets relevant to the tax investigation.

2.      In Jersey this obligation has led to the Taxation (Exchange of Information With Third Countries) (Jersey) Regulations 2008. These regulations govern how the Comptroller of Income Tax can obtain information and how he and the courts can deal with those who decline to provide it.

3.      The Comptroller may require the subject of the investigation to provide information relevant to his tax liability. However the subject is unlikely to be in Jersey.

4.      More importantly, he may also require third parties – banks, trust companies or whoever else in Jersey may hold relevant information – to provide it, but can only do so if he has reasonable grounds for believing that the subject of the investigation has breached (or may breach) a tax law in the requesting country and that any such failure has led or is likely to lead to “serious prejudice” to the proper assessment or collection of tax (Regulation 3 (1)). So it must be a serious case.

5.      At least 30 days must be given for compliance with a notice (Regulation 4). Notices to third parties requiring production of documents may be backed up by a Court Order compelling compliance, where it is reasonably suspected that the third party will not comply or where the subject of the investigation (or any of the class of taxpayers to whom the notice relates) is suspected of a serious breach of a tax law in the other country (Regulation 8).

6.      Failure to comply is a criminal offence attracting a fine. Destruction or concealment of documents covered by a notice is also a criminal offence attracting a fine (Regulation 15(2)). Where the Court orders a search warrant, obstructing the search is an imprisonable offence (Regulation 15(3)).

7.      If the Comptroller serves a written notice on a third party he must also notify the subject of the investigation, giving reasons for the request, unless:

• such disclosure might identify informants, or
• there are reasonable grounds to suspect the subject has committed a criminal offence relating to tax, or
• he is satisfied that the disclosure would prejudice the assessment or collection of tax (Regulation 3(5) and (6)).

8.      This raises interesting questions for financial services providers on the sharp end of a written notice from the Comptroller. They will naturally be concerned as to whether or not they can contact their client about the notice. They will fear that this could constitute” tipping off” under the money laundering laws.

9.      There is no provision in the Jersey Regulations dealing with whether or not third parties may inform their clients about the request that has been made. What is clear is that the subject of the investigation must be informed by the Comptroller, except in the three circumstances set out above. If that has happened then it is hard to see how the trust company communicating with the client could be guilty of tipping off, as he is already aware of the investigation. Indeed the fact that the client has been officially notified will indicate that he is not suspected of a criminal offence, so that the money laundering concern should not arise (absent other factors).

10.  It should be remembered that a TIEA notice is not in itself reason to suspect that a crime has been committed. TIEAs cover civil tax avoidance as well as criminal tax evasion. Serious overseas criminal investigations into tax fraud might be expected to be pursued using other means such as the Investigation of Fraud (Jersey) Law which gives the Jersey police wide-ranging powers to gather evidence.

11.  Much will turn on the information the Comptroller provides to the third party served with the notice. The reasons provided by the Comptroller in support of the notice (or absence of any reasons) may give an indication of the nature of the investigation. If he says that the subject has been informed then it may well be safe to contact the client. If he says the client is suspected of criminal tax evasion then it would plainly not be safe to do so.

12.  It may be that if asked, the Comptroller would provide more information and might even indicate whether or not he was content for the client to be contacted. However one cannot assume he will be prepared to give such comfort.

13.  The linked question arises whether or not a suspicious activity report (“SAR”) should be made on receipt of a notice from the Comptroller. That must depend on each case. It certainly does not automatically follow that one must be made, but careful consideration should be given to it and the relationship should be carefully reviewed in the light of information you may have that others may not. If in doubt, legal advice should be sought.

14.  Caution is plainly the safest way forward. There is no guidance in Jersey to follow. There have been very few notices served, and no court decisions on them.

15.  There is provision for appealing against a notice, to the Royal Court. It remains to be seen how such appeals are treated. It is perhaps unlikely that the court will require disclosure of the underlying basis for the notice where there is sensitivity about the material, though potentially the court could examine the material itself to satisfy itself that the TIEA rules and the Regulations have been followed. Challenges may be more fruitful in relation to the width of the request or the time allowed to comply.

16.  This is a leap into the unknown. It is to be hoped that the Comptroller will be as helpful as he can be in dealing with the industry on TIEA requests.

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