Lately offshore banking centers such as Andorra, Luxembourg, Lichtenstein, Switzerland, Singapore and Hong Kong have declared their willingness to ease the bank secrecy principle and cooperate with foreign tax authorities in cases of alleged fraud. Now the relevant legislation of the offshore banking centers has to comply with the Organization for Economic Cooperation and Development (hereinafter OECD) regulations on this particular matter.

Let’s see how bank secrecy principle at an offshore banking center will be affected by the OECD’s rules. There is the OECD Model Tax Convention and its Article 26 provides the basis for bilateral exchange of information between foreign tax authorities. The latest version of the Article was approved by the OECD’s Committee on Fiscal Affairs on June 1, 2004. Article 26 sets down a legal obligation to exchange information. This information should be reasonably and forseebly considered to be relevant to the correct application of a tax convention and also for the purposes of the administration and enforcement of relevant domestic tax laws.

The first paragraph of the Article sets the main rule regarding the exchange of information:

“The competent authorities of the Contracting States shall exchange such information as is forseeably relevant for Offshore Banking Secrecy, Bank Secrecycarrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation hereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2.”

According to the 2 paragraph any such information that falls under the characteristics of the 1 paragraph is to be considered confidential and secret “in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes”. At the same time such information can be used only for precise purposes as requested. However further on it may be disclosed in public court proceedings or in judicial decisions.

Still there are certain exceptions to the legal obligation to provide information. In this sense, Article 26 paragraph 3 states:

“In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).”

However according to paragraph 4 and 5 of Article 26 a domestic tax interest requirement or domestic bank secrecy rules do not limit the obligation to exchange information.

Thus, an offshore banking center which will adhere to the OECD rule on exchange of information will not be able to hide under the principle of bank secrecy. Of course tax havens will guarantee their clients some degree of confidentiality as the procedure of exchange of information will be done in a case by case manner and only if the request for information will be objectively justified.