The reporting obligations imposed on lawyers are inconsistent and confused.
Tax avoidance has become a central issue in the election campaign. So what is usually a topic for a small, specialist group of lawyers has become an item of general interest. And, yes, there is a strong link to lawyers’ core concerns.
My eye was caught in this context by two linked stories. First, I saw that the Law Society has responded to the Home Office’s call for opinions on the current suspicious activity reporting regime within the anti-money laundering regime by saying that the element of intent should be restored to money laundering offences connected to the duty to report.
Then I saw that the Organisation for Economic Co-operation and Development (OECD), home to the Financial Action Task Force (FATF) which first dreamed up the reporting obligations on lawyers in money laundering cases (despite constant lobbying that it breached our confidentiality obligations), has issued a consultation paper on mandatory disclosure rules in cases of tax avoidance. Uh oh, I thought, here we go again.
But I have been pleasantly surprised on reading the OECD consultation to see that it recognises the strength of lawyers’ confidentiality. The paper reviews existing schemes, including the UK’s own DOTAS (Disclosure of Tax Avoidance Schemes), and lays out certain models for its future recommendations. (Remember that it was FATF recommendations which were eventually turned into the iron law of the anti-money laundering directives, and so it is worth keeping an eye on their recommendations.)
In brief, the OECD offers two basic models for disclosure: one where both the promoter of the tax avoidance scheme and the taxpayer have the obligation to disclose the scheme separately, or one where either the promoter or the taxpayer has the duty to disclose. And one of the grounds for opting for the second model is - take a deep breath - ‘where the promoter asserts legal professional privilege’. In other words, if privilege prevents the lawyer/promoter from disclosing, then the taxpayer must do so. News of how lawyers operate has finally reached OECD headquarters in Paris.
Before going back to the substance of the principles at stake, I would just point out to the OECD that their name for - and so their understanding of - legal professional privilege is very common law based. For instance, they say in their document: ‘The client has the option of waiving any right to legal privilege and, if that happens, the obligation to disclose remains with the promoter.’ Well, first, it is not called legal professional privilege in civil law systems, and, second, many civil law systems do not permit client waiver of the professional secret.
In addition, the OECD’s understanding of the extent of privilege - ‘legal privilege generally only applies to confidential legal advice given to the client by the professional adviser and does not extend to… the identity of the parties involved’ - does not accord with the advice given by the Law Society in its published advice on disclosure of tax schemes, where it says: ‘However, the advice your client received from you on the merits of the scheme and how it should be constructed would be privileged as is any information which identifies or is capable of identifying the fact that legal advice has been taken (this would include information on related issues such as the identity of the lawyer etc).’
I hope that this will persuade the OECD, now that it has understood one of the fundamental concepts of our democratic legal systems, that it should not compel lawyers to tip off the tax authorities about proposed schemes. Lawyers are not policemen, and the roles of these two distinct players in the field of justice should not be confused.
But the bigger point is this. If professional secrecy (or whatever the OECD wants to call it) operates to protect lawyers from disclosing information on tax avoidance schemes, which is a correct way of proceeding, then why does it not operate, in another part of the OECD wood, to protect lawyers from making suspicious activity reports in the framework of money laundering? There is no consistency here.
My advice is for bars and lawyers to respond to the OECD consultation - deadline 30 April 2015 - to ensure that: the option for taxpayer disclosure alone is retained; and that the professional secrecy exception is properly understood and fully respected. We in the UK may feel that the current version of DOTAS protects lawyers’ values, but an OECD recommendation limiting it might have the effect of introducing constraints which are eventually welcomed by a future government, particularly now that chasing tax avoidance has become such a popular political pastime.
One day, too - let me dream - the rest of the OECD might also discover the meaning of professional secrecy, and repent of its omission in its money laundering recommendations on suspicious activity reports…
Jonathan Goldsmith is a consultant and former secretary-general at the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs