Mapping Financial Secrecy

In 1990 the Financial Action Task Force issued 40 Recommendations intended to provide a complete set of counter-measures against money laundering covering the criminal justice system and law enforcement, the financial system and its regulation, and international co-operation. These have been regularly updated, most recently in 2003. Though not a binding international convention, many countries in the world have made a political commitment to combat money laundering by implementing the 40 Recommendations. Between 2001 and 2004 further recommendations were added to tackle terrorist financing, making 49 in all. See http://www.fatf-gafi.org/document/28/0,3343,en_32250379_32236930_33658140_1_1_1_1,00.html for more details.

A person, usually but not always qualified by examination, who prepares accounts, offers taxation and commercial advice and who may audit the accounts of companies and other limited liability entities when that is required by law.

The books and records, both internally generated and supplied by third parties with whom the entity contracts, which are required to prepare a set of accounts.

Regulations governing the way in which certain transactions are reported within the accounts of companies and other entities. Originally issued on a national basis, and usually by the professional bodies of accountants within each country, they are now being supplanted by International Financial Reporting Standards issued by the International Accounting Standards Board.

The annual published statements issued by a company in accordance with the legislation and regulation of the country in which it is incorporated for the benefit of shareholders and others (if they are permitted access under local law) who wish to appraise the financial performance of a limited liability company or other limited liability entities such as a limited liability partnership. If the company is registered on a stock exchange which requires compliance with the rules of the International Accounting Standards Board, then the accounts will also have to comply with their rules. Otherwise they will comply with locally issued accounting standards. The report will normally include a statement from the directors of the company providing an overview of the trading of the entity for the year, a profit and loss account showing its income and expenditure during the period and its net profit plus an estimate of taxation liabilities that will arise from them, a cash flow statement showing how it used the net cash surplus or deficit that it generated during the course of the year, a balance sheet showing its total assets and liabilities at the year-end as represented by the total net investment by the shareholders and notes to the accounts which explain each of the statements.

Some jurisdictions, such as the UK, stipulate that a trust may not exist in perpetuity and that the capital of the trust must instead after a stipulated accumulation period be distributed to the beneficiaries. The length of such period varies depending on the trust deed and nature of the trust. Some jurisdictions, usually in secrecy jurisdictions, allowed trusts to continue in perpetuity.

The use of complex schemes of uncertain legality to exploit taxation loopholes for the benefit of taxpayers who can afford the fees charged by professional advisers who create such arrangements.

Anti-money laundering: Measures taken to prevent money laundering.

Treating income earned outside the country of residence as liable to tax in the year in which the income is earned, even if it is not remitted to the country where the tax is payable. Compare with the remittance basis.

(see constitution): A constitution is a set of rules for the government of an organisation. Perhaps most commonly associated with states, they also manage the way in which companies, corporations, trusts, foundations and other organisations are managed.The constitution of a company is often called its articles and memorandum of association, or in the USA its articles and memorandum of incorporation. For a trust the constitution is the trust deed, for a partnership it is either the partnership deed or agreement. It is important that third parties have access to such constitutions, not least because they often include limitations on the activities of the entities in question and if they trade beyond those agreed limitations their actions can be deemed to be ultra vires i.e. beyond their powers, and in that case the person trading with the entity that has acted in this way may find themselves without legal recourse for recovery of their funds.

An asset protection trust includes a clause preventing a trust beneficiary from passing his or her expected interest in the trust to a creditor. The Cook Islands created the world's first asset protection trust law in 1989. This was controversial because under its provisions the settler of the trust could also be a beneficiary, a feature generally making a trust void in the USA and UK. The law in question has now been copied by a large number of tax haven jurisdictions as part of the general “race to the bottom” in regulation. Controversially it has also been copied by some US states, including Delaware.

Banking secrecy laws strengthen the normal contractual obligation of confidentiality between a bank and its customer by providing criminal penalties to prohibit banks from revealing the existence of an account or disclosing account information without the owner’s consent. Found in a majority of secrecy jurisdictions, banking secrecy laws can help to obstruct information gathering requests from both national and international competent authorities such as tax administrations or financial regulators. Until 2005, most of the concluded double tax agreements did not specifically include provisions to override banking secrecy laws when responding to information requests by foreign treaty partners. Bank secrecy was, and remains in these cases, a massive obstacle to progress in obtaining information required to secure tax enforcement.

A bare trust is a trust in which the beneficiary has an absolute right to both the income and capital of the trust and may as such ask for them to be paid to them at any time. The result is that the trustees are simply nominees for the beneficiary. This means that the trust income and gains are also the property of the beneficiary and should therefore be taxed as their own in whatever jurisdiction they are resident.

A bearer share differs from a normal share because no record is kept of who owns it. Whoever physically has the bearer share is for legal purposes its owner. Bearer shares are used to preserve anonymity on the part of owners. Because of their potential use for money laundering and in tax evasion they are severely frowned upon but some states, including the UK, still allow their use regardless.

The person who actually has the right to enjoy the income or capital that possession of property might provide. The terms is used to contrast with the legal or nominee owners of property and with trustees, all of whom might be recorded as having legal title to property without possessing the right to enjoy the benefits of using it.