Fewer Russian HNWIs hiding assets from authorities

In recent years, the number of Russian high net worth individuals (HNWIs) reporting their foreign accounts to the country´s tax authorities, as required by the law on foreign exchange regulation, has quadrupled (increased by 4 times) according to the results of a survey by Tranio and Adam Smith Conferences, conducted in 2017 among 60 private bankers, lawyers and tax advisors working with Russian HNWIs.

Russian tax and foreign exchange residents are finding it increasingly difficult to hide their wealth abroad due to recent changes to the law on foreign exchange regulation, amendments to the Administrative Offences and Criminal Codes that introduced harsher penalties for the concealment of foreign accounts, as well as Russia joining the OECD’s Multilateral Competent Authority Agreement for the Common Reporting Standard (CRS MCAA), under which Russia will automatically receive information on its residents´ foreign bank accounts from 2018.

According to the survey, around 40% of Russian nationals with foreign bank accounts declared them to tax authorities after Russia joined the CRS MCAA, compared to 10% before.

According to Tranio managing partner George Kachmazov, individuals who declare their foreign bank accounts usually open new accounts with a clear transaction history for such purposes. Previously owned accounts are closed, and the funds from them are transferred through back channels to avoid any connection between their old and new accounts.

What do Russian nationals who do not want to declare their foreign accounts do? According to a 2016 survey, 48% of the respondents said that such individuals would most likely change their tax residency, while in 2017, this figure increased to 78%. One-third of respondents said that Russian HNWIs are becoming de-facto tax residents of other countries, 27% said they are changing their residences using foreign residence or citizenship-by-investment programmes, and 18% of the respondents mentioned both.

Among Russian nationals who change their tax residences, Cyprus (63%) and the United Kingdom (60%) are the most popular jurisdictions. Cyprus was also the top choice in 2016, with 41% of respondents mentioning the country. Monaco, Malta and Switzerland are also popular choices, with each country mentioned by around 30% of respondents. Other respondents named Andorra, Greece, Spain, Luxembourg, United Arab Emirates (UAE), United States (US) and Baltic countries, among other jurisdictions.

“The immense demand for the Cypriot investment programme is because of its simplicity”, Mr Kachmazov said. “For €2 million, an investor´s entire family can become nationals of the country in 3 months. Actually, Cypriot citizenship helps many of them get into the UK; the UK’s Residency by Investment programme is considerably more time-consuming and until recently has been significantly more expensive. And the UK is one of the hottest destinations as it neither extradites self-exiled tycoons nor returns their capital”.

Among respondents, 35% stated that Russian nationals not wishing to reveal their accounts transfer their capital to nominal owners (24% in 2016). Most often, relatives, friends and other close associates act as the “nominal” owners (55%). Trusts are almost as popular (48%), while other categories of nominal owners were cited by less than one-third of respondents.

About one-third of respondents said that Russian HNWIs most often closed their foreign accounts and transferred their capital to Russia (37% in 2016 and 33% in 2017). the proportion of respondents who said that owners of foreign bank accounts are transferring their capital to jurisdictions not participating in the CRS is significantly lower: 20% in 2016 and 17% in 2017.

The most popular of such jurisdictions are the UAE and Singapore, which had not yet joined the CRS MCAA at the time of the survey. Even after joining the agreement in June 2017, Singapore plans on exchanging tax information only with jurisdictions that are able to guarantee the confidentiality of the information and prevent its misuse. Singapore authorities do not consider Russia to be one of these countries.

Many HNWIs also transfer their capital to the US (28% in 2017 and 15% in 2016). Mr Kachmazov said the US, which has effectively proposed lifting bank secrecy and leads the fight against the money laundering, has now become one of the major and the least-transparent offshore financial centres.

There are also owners of foreign accounts who do not plan on declaring them to tax authorities, but are not taking any actions either – 30% of the survey respondents chose this option in 2017, and 22% in 2016.

As for controlled foreign corporations (CFCs), according the survey respondents’ estimates, not more than 50% of Russian CFC owners are reporting their ownership to tax authorities in 2017. Many of those who are not going to do so will re-register their companies to nominal owners (43%) or transform them into structures with no formal control criteria established by Russian legislation (47%). One of such criteria, for instance, is that a Russian tax resident owns over 25% of the foreign company's stock. To get around this, the actual owners may retain less than 25% of the stock while having their controlling roles determined in the internal agreements of their companies, which are not reported to tax authorities.

“Many clients currently believe that there's no point in owning an offshore company, given that Russian small enterprises pay only a 6% turnover tax. Running a business in Russia is less expensive than doing so in a foreign country, for which purposes it will be necessary to maintain an administrative infrastructure there and go (or pretend to go) abroad to take managerial decisions. CFCs are still relevant for large companies whose capital allows creating beneficial tax schemes and protecting their businesses from the risks related to the Russian jurisdiction”, Mr Kachmazov said.

Despite the fact that hiding foreign assets from Russian tax authorities is becoming riskier and increasingly difficult, results of the survey by Tranio and Adam Smith Conferences shows that more than half of Russian HNWIs are still not going to disclose information regarding their foreign bank accounts and companies. This is not only to avoid paying tax, but also due to their concerns that such information might fall into the hands of malefactors, which pose financial and personal security threats.