Plans to build up the Botswana Financial Services Centre (IFSC) was this week facing a crisis after Botswana failed the Organization for Economic Co-Operation and Development (OECD) Global Forum on Transparency and Exchange of Information for Tax purposes peer review.
Following the global financial crisis and subsequent G20 meetings, the OED is spearheading a multilateral effort to eliminate tax havens and share taxation information among countries. In 2009, a universal standard was adopted and in a move to ensure transparency, all countries were subjected to a ‘peer review’ that would lead to an appraisal of the economic policy of each country in 2-phase process. The countries’ legislative and regulatory framework was assessed in the first part and in the second phase, the effective implementation of these regulations was scrutinized.
The peer review, however, stated that Botswana and Panama could not proceed to the phase two of the review until they have acted on some recommendations which are expected to face strong political resistance in Botswana.
The peer review insisted that Botswana should ensure company ownership and identity information should be made accessible including on bearer shares and shares held by nominees. This is expected to open a political can of worms as most Batswana fear that some political leaders may be looting the country and hiding their identity behind nominees. This perception is not helped by the leadership’s reluctance to declare their assets as was agreed in parliament three years ago.
The Botswana law currently requires that only the nominal shareholder is listed in the share register, regardless of whether that shareholder holds the share for the benefit of a third party. The Peer review has, however, recommended that “an obligation should be established for nominees to maintain relevant ownership and identity information where they act as the legal owner on behalf of any other person”, before Botswana can move to the OECD white-list.
OECD “Know your client” rules specify the need to identify owners of companies, founders, members of council, and beneficiaries of foundations. Professional secrecy rules should be amended so that they do not prevent the exchange of information for tax purposes, especially in respect of lawyers acting as resident agents. The review team also recommended that Bank secrecy should be eliminated in connection with a request for information under an international agreement that provides for disclosure. Currently, personal bank details can only be obtained through a court order as a result of court proceedings in Botswana. This is expected to face political resistance, especially as political leaders seek to protect identities of their secret international donors.
There are fears that globalized world banks have become refuges for money laundering and insurgent groups to hide their funds. Many countries find it difficult to extract information related to accounts from banks in countries with financial regulations similar to Botswana’s. In 2009, the U.S. investigated Swiss bank UBS, which refused to reveal information regarding account holders who were suspected to evade taxes in the U.S. The Botswana situation is not helped by the fact that registration requirements for an external company do not require that the company provide information on the identity of the company’s shareholders or members. The external company must provide copies of its articles of incorporation or registration, its constitution, charter or articles, a list of its directors, and the name and address of a person resident in Botswana (other than an external company) who is appointed to have responsibility for the management of the company in Botswana, accept service of process and to be answerable for all matters required of the company under the Companies Act.
In response to the review team, the Botswana Registrar of Companies stated, “We agree that maybe it was an omission for the Act not to expressly state, as one of the requirements for an external company to register in Botswana, that a list of shareholders (or the share register) should be filed with the application for registration. It may not be enough that external companies are required by section 217 to file annual returns which information will include the name and address of each shareholder of the company. In looking to close the grey areas which have appeared in the implementation of the Act, this will definitely be one of the areas for which amendment will be necessary.
We agree that the provisions of section 218 (1) (c) as crafted leaves a lot of undesirable loopholes to be exploited by unscrupulous people, This is also one area where amendment of the Act will be necessary to aid the smooth implementation of the Act, while also making for easy access to company records at the Registrar’s office, which is easier to locate than that of a company secretary of an individual companies.”
The review team for its part concluded that, “Botswana is committed to implementing the agreed international standards on transparency and effective exchange of information and also to working with other members of the Global Forum to ensure as wide and complete an implementation of the standards as possible.”
The review team quoted the late Minister of Finance and Development Planning, Baledzi Gaolatlhe, in his speech at the launch of the IFSC in 1998: “the intention of the Center is for Botswana to serve as an entry point for capital investment in Africa.”
The review team noted that, “however, this Center has been unfairly viewed by Botswana’s neighbours and others as a conduit for effective tax planning. These observations and international best practice have therefore created the need for Botswana to introspect with a view to ensuring that there is transparency in the operations and implementation of the income tax system. To this end, Botswana agreed to be peer reviewed, with the primary intention of gauging herself against international best practice but also to receive assistance (wherever she fails) in improving the tax regulatory environment”.
