For several years now, some of us in the financial services industry have lamented the plethora of legislation which has been foisted on jurisdictions, especially the British Overseas Territories like Anguilla and the BVI, by international bodies and foreign countries. We have argued in public and in private to government officials that some of this legislation may infringe our constitutions and that the statutory bodies and government officials which are charged with enforcing said legislation often act in ways which are anathema to the system of due process inclusive of fairness within which our societies function. I speak from personal experience when I comment on this matter since my firm once successfully sued the local police/Financial Intelligence Unit for the manner in which a search warrant was executed on the office in 2009.
Based on my observations, these bodies often act in ways which give the impression that they are above the law and believe that their actions are not subject to judicial review. It also seems that they operate with the view that their mandate to fight crime supersedes the constitutional rights of citizens and all other laws do not apply to them.
It is with this in mind that I was very pleased to read of the decision in Friar Tuck Ltd, Quiver Inc and International Tax Authority. This case, which deals with the claims of two companies, i.e. Friar Tuck Ltd and Quiver Inc against the International Tax Authority, a BVI statutory functionary which served notices on them to produce certain tax information, reaffirms the general principle that all exercises of state power are subject to judicial review unless specifically prohibited by statute. However, even then, such an ouster clause may not prevent the court from reviewing the actions.
Both companies, Friar Tuck Ltd and Quiver Inc, were incorporated in the BVI under the companies legislation while the International Tax Authority (ITA) is a public functionary empowered to conduct its activities under the Mutual Legal Assistance (Tax Matters) Act 2003 (MLA). Among the MLA’s duties is to require the production of such information as is necessary in order to comply with requests from foreign governments.
In March and July of 2015, pursuant to its powers under section 5 of the MLA, the ITA served notices on the companies requiring them to provide specific information which was itemized in schedules and produce certain documentation. This was to be accompanied by an affidavit in a specified form. The notices made it clear that pursuant to section 5(6) of the MLA, a person who, without lawful or reasonable excuse, fails to comply with the terms of the notice commits an offence and is liable on conviction to a fine or imprisonment.
The notices did not provide details of the contents of the requests from the foreign authority, including the identity of the requesting state. The companies argued also that the notices did not identify the relevant taxpayer who would be the subject of the enquiry, the relevant tax years under investigation or the period of interest. They also did not identify the tax purposes for which the information was sought or the reasons for believing that the information requested was foreseeably relevant to the administration or enforcement of the domestic laws of the requesting state.
In May and September 2015, the companies’ legal representative brought their concerns to the attenton of the ITA by highlighting their inability to assess the validity of the notices given the lack of information or the absence of the factual basis underlying the requests. In November 2015, the ITA responded by letter making clear its position that under the MLA, it has no obligation to outline the name of the taxpayer, the requesting jurisdiction or any other information to a third party when a ntoice to produce information has been issued. The letter stressed the ITA’s duty of confidentiality under Article 8 of the relevant Tax Information Exchange Agreement (TIEA) which it contended prohibited the disclosure of information to the recipient of the notice. The ITA also pointed to section 9 of the MLA, to bolster its refusal to provide information. That section states that “the particulars of and all matters relating to a request shall be treated as confidential” and provides that “no person who is notified of a request….or in any way becomes aware of a request shall disclose the fact of the receipt of such a request or any of the particulars required or information supplied to any person except in accordance with the Agreement.”
The ITA argued that the relevant request was properly vetted and the notices properly issued; thus, the application for judicial review by the companies was without merit. The companies countered that argument by contending that the ITA acted in breach of the fundamental duty of fairness and unlawfully, by failing to disclose any material information concerning the factual basis for the issuing of the notices to enable them to assess their validity and if necessary to challenge them in court.
The court’s legal analysis
The court begain its legal analysis of the issues by stating the general principle that it is settled law that whenever a public function is being performed, there is an inference in the absence of an expressed requirement to the contrary, that the function is required to be performed fairly. The inference will be more compelling where it is a case of a decision which may adversely affect a person’s rights or interests or when a person has a legitimate expectation of being treated fairly.
Justice Vicki Ann Ellis, who ruled on the matter, noted that courts have on occasion gone further to supplement statutory provisions with principles of procedural fairness. The judge quoted Lord Bridge in Lloyd v McMahon, who said: “In particular, it is well established that when a statute has conferred on any body the power to make decisions affecting individuals, the courts will not only require the procedure prescribed by the statute to be followed, but will readily imply so much and no more to be introduced by way of additional procedural safeguards as will ensure attainment of fairness.”
The judge went on to state that based on the case law, when following this course of action, judicial restraint is necessary. She quoted Lord Reid in Wiseman v Bourneman who stated: “For a long time the courts have, without objection from Parliament, supplemented procedure laid down in legislation where they have found that to be necessary for this purpose. But before the unusual kind of power is exercised it must be clear that the statutory procedure is insufficient to achieve justice and that to require additional steps would not frustrate the apparent purpose of the legislation.”
She added that, as per the writers in DeSmith’s Judicial Review:
“The test today of whether to supplement statutory procedures is no longer whether the statutory procedure alone could result in manifest unfairness. The preferable view is that fairness must without qualification be attained and that the “justice of the common law” may supplement that of the statute unless by necessary implication the procedural code must be regarded as exclusive. Under either test, similar factors are likely to be relevant: the comprehensiveness of the codes, the degree of deviation from the statutory procedure required and the overall fairness of the procesures to the individual concerned.”
The ITA did not argue that the rules of procedural fairness did not apply in the cases but asserted that in the absence of an express requirement for disclosure, it was not under an obligation to do so. The ITA’s position was that the information contained in the requests was confidential state-to-state communications which it was not obligated to provide to the companies under the terms of the MLA.
Justice Ellis ruled that in her view, applying the test identified above, the “justice of the common law” demanded that the ITA acts in a manner that was procedurally fair to the companies. She noted however, that the court was fully cognizant that the duty of procedural fairness could not be applied in a hard and fast way. She stated: “The duty of procedural fairness is flexible and variable and depends on an appreciation of the context of the particular statute and rights affected. Ultimately, administrative decisions must be made in a fair and open procedure which is appropriate to the statutory, institutional and social context of the decision which is to be made.”
The judge continued by setting out a non-exhaustive list of factors which are relevant to determining what is required by the common law duty of procedural fairness in any given set of circumstances. She included the following:
1. The nature of the decision and the process followed in making it.
2. The nature of the statutory scheme and the express terms under which the public body operates.
3. The importance of the decision to the individual(s) affected and the consequences which follow.
4. The legitimate expectations of the person likely to challenge the decision.
The court continued its analysis by referencing the “Confidentiality-Transparency Divide.” Justice Ellis noted that there are limitations on the duty to disclose information for example or where questions of national security arise or where the information is inherently or statutorily confidential. She added that the court must always have regard to the particular statutory scheme within which procedural fairness is to operate and the limits which this may imply.
The court then proceeded to review relevant cases from within and outside the Caribbean region. For purposes of this article, I will not comment on each case which Justice Ellis analyzed but will focus on the one which seemed to have informed her thinking, i.e. Bunge Limited v Minister of Finance, a case out of Bermuda. Bunge Limited applied to the Supreme Court of Bermuda to challenge the minister of finance’s decision to issue a notice to produce tax information, by way of judicial review. Bunge argued that the notice was legally invalid and sought to have it set aside on the basis that the underlying request did not satisfy the statutory requirements of the relevant TIEA and the enabling legislation which allowed the minister to issue the notice. Bunge never saw the request from the Argentine authorities and thus, it made an application to the court for an order for disclosure by the ministry of finance of the said request.
The ministry of finance opposed the disclosure application, arguing that the confidentiality provisions of the 2005 Bermudian Act and the TIEA, when read against the Organisation for Economic Cooperation and Development‘s (OECD) publications and guidance notes in this area, prevented it from giving disclosure of Argentina’s confidential request. The assertion by the minister that OECD publications and guidance was legally binding on Bermuda was a novel and ludicrous argument and goes to the heart of the concerns that many of us have about the way in which international organizations are influencing local jurisprudence outside of domestic statutory incorporation.
Justice Stephen Hellman accepted Bunge’s argument and confirmed that both fairness and justice require that the the recipient of a notice should be entitled to see the request. This was only to the extent that its contents are relevant to the question whether the requirements of section 4 of the domestic Bermudian legislation were satisfied and in particular, whether or not the information required by the notice was identified as such in the request.
Justice Ellis noted in her decision that while counsel for the ITA argued that the court should not follow the decision in Bunge, said counsel advanced the argument that it should follow the decision in Larsen v Comptroller of Taxes, a case out of Jersey, Channel Islands, in which the court declined to follow the decision in Bunge. The learned judge stated that Larsen is distinguishable and of limited assistance to the court because the particular facts did not require the court to consider the principles of procedural fairness.
Larsen concerned an application for judicial review but the application before the court was one seeking an order for specific disclosure of the request. Justice Ellis commented that, in this context, it is not surprising that the decision in Larsen largely dealt with the principle which governed disclosure in public law proceedings and the duty of candor. She added that it is clear that despite the comptroller not conceding any obligation to do so, the comptroller did indeed disclose the letter of request. It was clear that the reasons for the issuance of the notices were fully and fairly set out in affidavit evidence. Granted this, the judge remarked that it is not surprising that the court in Larsen concluded that the claimants in that case were sufficiently apprised of the background and the reasons to challenge that notice if they wanted to. She further added that the judgment in Larsen is not an outright rejection of the reasoning in Bunge but instead it reflects the well-known principle that each case must ultimately be decided on its own facts.
The judge advanced her position by pointing out that an analysis of the relevant case law both within and without the region reveals that the courts do not shy away from engaging this balancing act or from concluding more often than not that enough information should be disclosed as would permit the affected party to assess whether there is any basis to challenge a notice. She added that in cases where the claims for disclosure have been defeated, it usually occurs where there has been some degree of voluntary disclosure by the relevant agency or where the court found that the affected party already had sufficient information on which to make a decision as to whether or not to challenge the notice.
However, the judge expressed the view that caution should be applied here. She added that granted the peculiar nature of the cases, proper weight be ascribed to the need for confidentiality. She went on to say that the automatic disclosure of a request under a TIEA is inconsistent with the legislation. Her view was that the court was satisfied that there were very good reasons to support the ITA’s contention that the starting point or default position should be that such requests under a TIEA should remain confidential.
In her words: “There can be no doubt that indiscriminate disclosure runs the risk that nefarious scoundrels would be able to benefit from early notice of the status of an investigation and through delay tactics frustrate the course of justice. Invariably indiscriminate disclosure could derail confidence in the system of mutual legal assistance thus defeating the ultimate goals.”
In handing down her decision, Justice Ellis summarized the key point as follows: “… the peculiar context here prescribes that intra-governmental requests are confidential and should not be disclosed unless the justice of the case demands it. The court is not satisfied any such threshold has been satisfied in this case. However, the court finds that procedural fairness demands that the ITA provide a sufficient level and degree of information to enable representations to be made as to the lawfulness of the notice or indeed the request.”
It is clear that the behavior of the ITA in refusing to even give the companies basic information worked against it in the eyes of the court. Justice Ellis commented that the court was not persuaded that there was sufficient information given to the companies in the notices by which an individual applying commonsense would have gleaned the background and subject of the investigative inquiry. She went on to state that she did not agree that the facts of the case were simlar to Larsen and opined that procedural fairness demanded that the companies not be relegated to surmise and conjecture.
The court gave the ITA 28 days to provide information to the companies to show that it complied with the statutory framework of the TIEA and fairness. The information had to include the source of the request, the tax period under investigation and a summary of the nature of the investigation.
Justice Ellis expressed displeasure with the overall conduct of the ITA. She noted that the ITA ignored the companies’ requests and shielded itself in the claim of confidentiality provided for in the legislative framework. The ITA made no attempt to contact the requesting state to positively verify that there was the possibility for prejudice to the investigation or whether or not some concessions could be made on the issue of disclosure. The judge expressed surprise at this since “it is clear that it is always open to a requesting authority to agree to the disclosure of the letter of request by the ITA or a redacted version thereof as has been done in numerous cases cited. The implacable position adopted was clearly not consistent with the modern day practice.”
The conduct of the ITA would have come as no surprise to keen observers of such bodies over the years in the execution of these duties granted the strict and often state-friendly manner in which the legislative frameworks under which they operate have been drafted. The general ethos of many of these bodies such as the ITA, the FIUs and other competent authorities for purposes of implementing the many international agreements that jurisdictions have been forced to adopt over the years, is one whereby individuals and firms are treated as guilty until proven innocent. These bodies seem unaware that despite their mandates, they do not operate in a legal vacuum and that general common law principles which have existed for hundreds of years, long before TIEAs, FIUs, and the OECD existed, still apply to them.
Friar Tuck is a welcome and needed reminder that fighting crime, adhering to international agreements, and assisting foreign governments to collect taxes, are no excuses for trampling on the rights of individuals and firms. It should be hailed across the region and all international financial services jurisdictions as a reaffirmation of the rule of law.