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US Citizen takes injunction against French government over trust secrecy ...and wins

On May 10th, the French tax administration passed a law which would enable public access to the national register of trusts, on the constitutionality of the ‘Decree’. Subsequently, public access to the Trust register was suspended on 22nd July 2016 by the highest court in France, the Conseil consitutionnel. The ruling shows the tremendous uphill battle that the European Commission will face whilst proposing an interconnected registry of beneficial ownership, given that it will be up to national jurisdictions to implement these laws fairly.

 The cause? A U.S. Citizen, tax resident in France, challenged the Decree before France’s highest administrative court, the Conseil d’Etat. The grounds for the challenge appear to be broadly sympathetic, and surround concerns over safety for the beneficiary. However, there is a serious concern that any regulatory structures around trusts will be abolished in light of this legislation. The oversight of the French administration in failing to consider the risks in publishing such data could have drastic implications.

 An unprecedented case

An American citizen, 89 years-old and a French tax resident, set up trusts in the United States for her upcoming succession and challenged the May 10th decree (2016-567) in the Conseil d’Etat. She was entirely compliant with the trustee filing obligations. Her lawyers argued that there was a serious doubt as to the legality of the decree, as it disregards several laws: including Article 8 of the European Convention on Human Rights, and Article 7 of the Charter of the fundamental rights of the European Union. The publication of personal data in the public register of trusts carries ‘a serious and disproportionate interference with her private life’, relating to provisions taken to her estate. Originally, the defense of July 11th countered that the Minister of Finance and Public Accounts decided to reject the request on the grounds that it is not a sufficient critique of the register of trusts: instead it is a critique of the general tax code.

However, her lawyers returned to the hearing on July 15th and reframed the legal dispute differently: they stated that several laws made in 2013 and 2015 to curb tax evasion and financial crime, infringe on the right to a private life under Article 2 of the Declaration of the Rights of Man and Citizen, 1789. The free and unchecked availability of her personal data, regarding the beneficiaries of the trusts made, are also highly sensitive. “Mrs. B’, who is 89 years old, claimed that the publication of the personal data of the beneficiaries of the trusts is likely to allow people around her to have access to information that should be confidential until succession - and likely to encourage them to exercise pressure on it to have it modified in the provision of the estate. The key issue here is that it was framed around the availability of this data for third parties, without having to justify a legitimate interest in this regard.

On July 22nd, the Conseil d’Etat agreed that this is a sufficient emergency to order the suspension of the register.

Public registers hang in the balance

shutterstock_342311696.jpgThis is currently an interim suspension order. It does seek the immediate suspension of the register pending the administrative courts three month hearing to decide whether to transmit the case to the Conseil constitutionnel. It remains to be decided as to whether the register will be scrapped entirely, or whether it will simply be modified so that one must demonstrate a legitimate interest to access the information. Currently, anyone with a French Tax ID code can access the register, which contains the names, dates of birth and place of birth of settlers, trustees and beneficiaries, including children.  

The law firm which represented ‘Mrs. B’, Arkwood SCP Paris (self-described as a ‘boutique tax law firm dedicated to private clients’) proudly gave a press release entitled ‘Arkwood Law Firm Obtains the Suspension of the Public Registry of Trusts’. Whatever their commitment to this particular client, as a ‘boutique’ tax law firm they clearly seek to gain the erasure of the public register:

“This decision is a very positive first step but does not prejudge the outcome of the decisions on the legality/constitutionality which should be taken in the coming months about the public character of the registry of trusts.“

Elsewhere, Arkwood seek to pinpoint their key objection to the register as ‘violat[ing] the right to privacy in a disproportionate manner.’

It is worth considering that other registers in France do not conform to this level of public disclosure. For example, the true French equivalent of a trust - a fiducie - has a register which is only accessible to the French administration: judges, customs officers, Tracfin, judicial police officers, etc. Ficovie - the French centralised database of life insurance contracts, created to fight against tax fraud and operational since April 2016, similarly has restricted access, limited to tax authorities ‘held to the obligation of secrecy’ who fight against tax fraud and money laundering, according to Le Monde.

Other French registries, such as Infogreffe (the commercial register), have been lauded by the government for the openness, but criticised heavily by NGOs for crucial omissions; upon launch, Regards Citoyen noticed that in the key figures sections of companies, the data covers only 800,000 companies out of 4,000,000 - barely 20%. The national inconsistencies are stark: how can a French resident with a proven history of systematic tax evasion, have their identity protected, when international beneficiary who has never filed a tax return must has their identity made public?

From a tax transparency basis it is preferable that instead of conforming to the current tendency for closed registers for these issues in France, more registers were opened for public access. However, the peculiarly sensitive data that is included in the trust register (the inclusion of minors and dependents for example) seems exceptional, and risky.  

The rashness of this inclusion risks derailing the provision of public registers not only internationally, but EU-wide. How did this oversight arise?

How did this happen?

Following the Panama Papers leaks, French finance ministers Michel Sapin and Christian Eckert signed the proposal and presented it at the Anti-Corruption summit in London on 12 May. The public outrage demanded an immediate response, and they got one: “This is a new step on the long road to transparency,” said Sapin. The French press responded accordingly with some fanfare; Le Monde lauded it as a “small revolution in a world traditional ruled by the secret”... “Testimony to the will of France”. Le Temps identified the issue of privacy, but noted that the relevant attention had been paid to the law. “Important point: the posting of information on the beneficiaries is not in violation, according to the French Ministry of Finance, of tax secrecy: “This is about who is behind these entities.” The register was launched on July 4th, 2016.

The easy assumption to make is that the inclusion of identification elements of the settlor, beneficiary and children were an oversight caused by the rush to respond to the offshore revelations. But this would overlook the fact that this legislation was considered on 6 December 2013, where the Prime Minister presented a draft legislation, focusing on the ‘use of bank accounts or entities owned abroad, such as trusts’. The declaration to make it public was surely a consequence of the Panama Papers - the timing is irrefutable. But given that there were clear calls for a public register prior to its implementation, how could the French administration fail to consider which data a public register should consist of?  

Another interesting point of timing in the French administration rolling back legislation towards trusts is that this policy (and challenge) has arrived post-Brexit. The French government held a meeting in Paris on 5th July suggesting that they would specifically try and lure city workers and financiers after Brexit, with the deputy Mayor of Paris earlier proclaiming ‘we are rolling out the red carpet’.

Additionally, on the same day, the Conseil constitutionnel removed the proportional fine (5% credit balance on foreign bank accounts) applicable to cases of unfiled declaration of foreign bank accounts held by French tax residents, as disproportionate. This decision affects trusts indirectly, as the failure to comply with trust reporting result in a proportional fine of 12.5% of the value of all the assets and rights in a trust - which could similarly be declared ‘unconstitutional’. Either way, there is clearly a shift appearing since May in the French administrations treatment of foreign wealth.

Solicitors call for the removal of public registers, and amendments to 4MLD

Coverage of this case in the UK has been limited to the blogs of overseas solicitors; there has been little attention given in the context of international tax transparency, the effect on future proposals for interconnected registries and open data. UK-based lawyers have been unduly vitriolic in their criticism of the law, bordering on offensive. Peter Harris of Overseas Chambers, called the affair ‘la Terreur par erreur’, and suggested that the amendments to the Fourth Money Laundering directive in the direction of public registers will go the same way:

“The Public Register of Trusts is not even in compliance with the proposal for a Public Register of Trusts which the European Parliament slipped in at the last minute in the 4th Money Laundering Directive”...”The dirty trick of using last minute amendments in Parliamentary proposals to secure a minority change in a law is an offence to that Institution's status.”...“The Emperor's New Clothes now being total transparency through the distorting lens of French administrative and legal incompétence”

Other lawyers gave earlier warnings with a little bit more circumspection; STEP stated on 27th June its opposition to public access to the trust register, suggesting that it would deter data supplied for tax purposes in good faith, and noting that ‘This information is strongly biased towards non-French structures, which are being treated on a different basis to French structures’.

Wealth management magazine Spears cited the register as further evidence that the French government despises ‘Anglo-saxon’ structures (and indeed nearly all of the articles referencing the trust described it as ‘Anglo-saxon’, a term frequently derided as a slur). Jean-Marc Tirard, an international private client partner at global law firm McDermott Will & Emery suggested that the legislation around trusts is grotesquely unfair, ‘and a scapegoat for the budget deficit.’ It is easy to see that ‘boutique’ lawyers will criticise the legislation with great syncronicity, as it is in the direct interests of their clients to do so. Currently, the law is on their side of the argument: the French administration demonstrably contravened national laws in implementing this register, to the dismay of transparency advocates.

A French problem, or an EU problem?

This issue highlights a particular theoretical contradiction running through financial technology and governance at the moment - privacy vs. transparency. The European Commission has stressed the need for national governments to be implemented, without a central register. But as these events show, this creates a considerable challenge for national lawmakers, not only in technical implementation, but legislative too.

It is incredible to consider that a U.S. Citizen suspended an entire national public register using a 1789 law, and inconceivable to think that the register will be recognisable should it re-emerge. The concept of trusts is still extremely contentious, both in law and public opinion in France, and perhaps this implementation will be easier in other countries. The issue of competence remains: couldn’t the register have been implemented whilst omitting the most sensitive data, and still provide the public data that was promised? Advisors in the Commission, as well as NGOs, will surely be concerned that this case could derail the argument for ownership registers on the entire continent, as the Commission roadmap indicates they are proposed for 2019.

[key quotations have been translated from original sources].


 

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