FATCA under attack

The recent decision by the High Court in Webster v HMRC [2024] EWHC 530 contains not only a fascinating insight into the process for challenging administrative legislation in the form of automatic exchange of information, but also appears to reveal a wide-ranging international attempt to undermine the far-reaching development of information exchange agreements between jurisdictions over recent years.

Background

The case concerns the position of an American citizen, Ms Webster, living in the UK who sought to bring proceedings against HMRC in relation to the disclosure of financial information concerning her to the US. These were made under bulk transfers of information under UK regulations to give effect to a UK/US intergovernmental agreement providing for compliance with the US FATCA regime. These transfers were made between 2016 and 2020, after which time she gave up her US citizenship.

The claim was originally conceived by way of judicial review (JR) in 2019 based on the incompatibility of the FATCA regulations with the provisions of UK data protection law. Ultimately, the JR proceedings were not progressed and instead Ms Webster brought a complaint to the Information Commissioner under the Data Protection Act 2018 and a claim for damages (and a declaration, later dropped) against HMRC for breach of the GDPR, human rights or the EU Charter of Fundamental Rights in respect of the bulk transfer of her financial information to the US.

One ground on which HMRC sought to defend this action was that the claim was an abuse of process. There were two strands to this argument. The first was that this was essentially a claim that the FATCA regulations were illegal as a matter of administrative law and any such claim should have been brought by way of JR, not a private law action. Secondly, HMRC considered that the claim was an abuse of process in that it was, in essence, not a genuine claim.

HMRC pointed to a number of features of the claim that questioned its motivation and genuineness. In particular, the fact that Ms Webster, as a US citizen, would have had to provide this information to the US on her US tax return in any event, the extreme costs incurred on the claim compared to the amount claimed (£10,000 to £50,000) and, most interestingly, the fact that the claim was funded by an undisclosed third party. HMRC explained that the identity of the funder went “to the 'true' nature of the Claimant's claim: not, it is said, an individual's pursuit of vindication and compensation, but a whole-system attack on the FATCA regime, funded as such by hidden interests, with that effect and outcome its objective, and by an entity whose relationship to the UK public interest is in the circumstances a material consideration”.

HMRC successfully sought an order for disclosure of details of who was funding the litigation, however Ms Webster was unable to provide this information on the basis that the identity of the funder was not known to her and only her lawyers, Mishcon de Reya. Eventually, documents were disclosed but with the name of the funder redacted, it being indicated that if the funder would withdraw funding rather than allow their identity to become public.

As a result of this impasse, the claimant sought to strike out HMRC’s abuse defence on the basis that it had no reasonable prospect of success. Alternatively, the claimant sought to strike out those part’s of HMRC’s defence that relied on the funder’s identity.

High Court decision

That strike out action has now been rejected by the High Court.

Firstly, the Court considered that the question whether the claim should have been brought by way of JR rather than a private action for damages was, at the least, an arguable one. Whilst there are a number of cases indicating that a claimant cannot abuse the process of the court by bringing a private law claim even where that is inextricably linked with public law issues, the issue was far from clear. Accordingly, the Court concluded that it was “satisfied the legal basis put forward by HMRC to underpin its abuse defence is not unreal, is more than statable, is properly arguable and has a more than fanciful prospect of succeeding. It is not so clear either from the authorities or from first principles that HMRC's abuse defence goes no further than being 'merely arguable', so as fairly to support a conclusion that it ought to be rejected on an interlocutory basis”.

Secondly, on the genuineness of the claim, the Court was equally entitled to run its argument based on the “propriety and procedure… transparency and fairness” issues. The negative conclusions invited on the facts were not “fanciful”. HMRC argued that whether the claim was genuine one for a meaningful remedy turns on “on an investigation, in all the circumstances, of its substantive and procedural reality and whether, in that reality, it turns out to be a deceptive Trojan horse for the infiltration and destruction of constitutional and legal protections for the public interest. Or not. And that is something a court has a duty to investigate – in the present case, with particular regard to the whole of the litigation history”. The Court agreed that the question was not a pure matter of law and and that HMRC’s argument for a holistic approach to the issue ought to be tested contextually on the full facts at a trial. In particular, the Court rejected the claimant’s arguments that issues around the disproportionate costs compared to remedy and subjective motivation could not be relevant were rejected. Both could be relevant in the wider factual and evidential picture going to the reality of the claim.

Finally, the Court refused the claimant’s application to remove any obligation to disclose the identity of the funder from the proceedings. The Court had found this issue to be relevant to HMRC’s abuse defence and, in any event, the opportunities for challenging the disclosure order had already expired.

Comment

In the context of the funder’s identity, the Court noted that Mishcon de Reya had further disclosed that the funder is: (a) 'a group of companies within the same group under common control'; (b) 'an international business with significant philanthropic interests which believes in privacy and data protection. It is owned by a number of individuals, none of whom are subject to FATCA'; (c) 'not based in the United States nor owned by a US institution'; and (d) 'not, whether directly or indirectly, owned by any state or Government entity'.

Ultimately, that was not enough to meet the necessary disclosure required in this case and it remains to be seen if, therefore, that is the end of the matter given the anonymity desired. But, as the Court noted, “in the context of the issues, raised by HMRC's defence and by the present application, about the precise nature of the claim the Claimant now wants to pursue, the fact that this much at least has been 'volunteered', apparently by way of reassurance, perhaps says something interesting in itself”.