Financial privacy is under global assault for a variety of reasons. What steps can high net worth individuals and families do to protect themselves?
Following the 2008 financial crisis and increasing global interconnectedness provided by new technologies we have experienced an unprecedented drive towards more transparency and, in turn, less privacy. Deman Smit, senior advispr at the private clients group at Maitland in Luxembourg, takes up the topic. The editors of this news service are grateful for this contribution to debate and invite responses. Readers can email firstname.lastname@example.org
"As a matter of historical analysis, the relationship between secrecy and privacy can be stated in an axiom: the defence of privacy follows, and never precedes, the emergence of new technologies for the exposure of secrets. In other words, the case for privacy always comes too late.” So stated the American historian Jill Lepore in The Prism, a 2013 article published in The New Yorker dealing with the mass surveillance programme whereby the National Security Agency collects data from US internet companies.
The case for privacy is indeed pressing given the various transparency initiatives around the world that are, in some way or another, forcing high net worth individuals to report sensitive private information to regulators. With the initiatives has come a plethora of acronyms, enough to confuse the best of us.
Try for a start: Foreign Account Tax Compliance Act (FATCA); the OECD’s Automatic Exchange of Information (AEOI); the Common Reporting Standard (CRS), a sub-set of the AEOI; Exchange on Tax Rulings (ETR); Treaty Relief and Compliance Enhancement (TRACE); and the proposed ultimate beneficial owner (UBO) register found in the 4th EU Anti-Money Laundering (AML) Directive
These transparency initiatives increase the capture, exchange and storage of sensitive private information across the globe in a data-driven economy where data has become the most valuable and all-pervasive commodity. The drive for transparency, being justified by governments on the basis of greater investor protection, financial system stability and exposure of tax evasion, is weighed directly against the encroachment of privacy.
Although some of the transparency initiatives contain data protection safeguards to be adopted when effecting cross-border exchanges of private data, numerous information leaks and hacking incidents being experienced across the globe raise cause for concern. Furthermore, even impenetrable cyber security fails when a tax inspector is bribed and leaks private data.
So what should HNW individuals do?
In the first instance - if you hold European citizenship - you could fight the case for your fundamental right to privacy as enshrined in article 8 of the European Convention on Human Rights and article 7 of the Charter of Fundamental Rights of the European Union. This fundamental right can only be breached if it is found lawful, necessary in a democratic society and proportionate.
The most recent European case law has however judged various information exchanges as meeting the aforementioned criteria and therefore as being justified and proportionate in the current economic climate. Moving to a “non-participating” jurisdiction could prove problematic, given that existing bank accounts are likely to be closed and access to the financial system restricted.
To the extent that HNW individuals will have to accept the exchange of their private data, the focus shifts to ensuring that such exchange remains as secure as possible. In Europe, the GDPR (General Data Protection Regulation) will enter into force in May 2018. The regulation includes various provisions to increase the rights of individuals regarding data protection. Amongst others, these include requesting explicit consent for processing of sensitive data, the “right to be forgotten” and thus for data erasure, increased rights and methods for claiming damages in case of breaches and material fines and penalties in case of infringement.
Max Schrems, the Austrian lawyer who essentially had the European Court of Justice declare the EU-US Safe Harbour Rules “non-adequate” in terms of data protection and replaced with the EU-US Privacy Shield, thinks GDPR may potentially open the door for “mass mandates”, a type of class action lawsuit against data breaches. He is currently in process with a class action style lawsuit against Facebook for alleged data breaches.
What of HNW individuals residing in jurisdictions where they face kidnapping or blackmail risks and have a concern about the jurisdiction’s data protection measures or information being leaked by corrupt civil servants? They can consider relocating to jurisdictions providing more adequate safeguards in this respect. For example, a wealthy Brazilian family facing such threats as a result of information being exchanged to the Brazilian authorities under the CRS may wish to consider relocating to Portugal, Switzerland, Luxembourg or the UK. As a result of their change in tax residence, information under the CRS would no longer flow to Brazil, but rather to their new jurisdiction of residence.
Many jurisdictions offer Citizenship-by-Investment programmes which would allow HNW individuals and their families to relocate. Luxembourg is one of most recent jurisdictions to offer such a programme with one of the options for applying for residence requiring a minimum investment of EUR500,000 in a local company. In terms of data security, Luxembourg will also host the world’s first “data embassy” whereby it will host sensitive data of the Estonian government on servers in Luxembourg to protect against cyber security treats.
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