After an intense investigation by the IRS, the United States Department of Justice (DOJ) pursued both criminal and civil charges against the giant Swiss bank. Federal prosecutors dropped criminal charges eighteen months later, however, after the bank admitted to fraud and conspiracy, paid a $780 million fine, and satisfied DOJ prosecutors that it had dismantled its offshore banking operations.

In August 2009, UBS agreed to a settlement with DOJ on the civil charges and as part of the deal, offered to hand over the names of 4,450 tax evading Americans to the IRS. For a moment, it looked like the Swiss government—in a grasping act of self-preservation—would step in and forbid UBS from handing over the names. But at the last minute, the two houses of Swiss Parliament agreed to stick to the deal.

The historic vote laid the groundwork for more legal action by the United States against several other Swiss banks—likely what the Swiss had feared.  These included Credit Suisse, Switzerland’s second largest bank, and HSBC, which is based in London, but has extensive Swiss operations under its Private Bank. There are now at least eleven Swiss banks under criminal investigation by the Justice Department’s tax division.

But DOJ’s approach and tone has shifted in recent months. Early last week, for the first time ever, “U.S. authorities have charged a bank rather than individuals with helping Americans evade taxes.” The bank was Wegelin & Co.; it is Switzerland’s oldest private bank.  According to the indictment filed last week, Wegelin helped Americans evade U.S. taxes on more than $1.2 billion in assets and after DOJ’s prosecution of UBS, “deliberately set out” to capture its counterpart’s lost cross-boarder illegal banking business.

Bryan Skarlatos, an attorney with Kostelanetz & Fink in New York, noted the indictment ”shows the [United States] is willing to go after Swiss banks themselves if they don’t turn over names of U.S. taxpayers who are account holders.” It also puts pressure on the Swiss government to agree to a settlement involving all Swiss banks.

In many ways, Swiss banks have born the largest share of DOJ scrutiny on tax evasion. The reason for that is relatively clear—Switzerland holds nearly one-third of the estimated $7 trillion in global wealth kept offshore.

But what about the other two-thirds? Switzerland is not the only place in the world to hide tax-evading money.  Some spooked depositors are sending it somewhere even more secretive, like Singapore, Hong Kong, and the United Arab Emirates. So should—and by extension—when should the DOJ pursue banks in other jurisdictions as aggressively as it has in Switzerland?

Prosecutors are already investigating banks in Asian jurisdictions. None have seen the level of DOJ involvement with Switzerland, but that doesn’t mean they’re safe. Nor should they be. As long as these banks continue to aid American citizens violate American laws, they should be held accountable. While Switzerland may hold a bulk of the world’s offshore tax-evading deposits, if DOJ pursues only the Swiss, they risk pushing the deposits to other, more secretive havens. So the answer is yes: DOJ should pursue tax evaders in other countries. And they should probably do it soon.

flickr / slangvei

Today, the House Subcommittee on Financial Institutions and Consumer Credit held a hearing on a proposed IRS regulation which would allow the IRS to track the deposits of non-resident aliens in the United States. The United States functions as a tax haven for many non-resident aliens, as the IRS is unable to determine how much money is hidden in US banks. The IRS is seeking the regulation as part of a global effort to increase tax information exchange, and eventually collect revenue from more US tax evaders. Video is available here.

Here’s how it all works. The IRS collects information on all interest payments paid by banks to depositors from residents in the United States, and uses this information to tax the depositors. However, the United States does not tax non-resident aliens, so that information is not collected. These non-resident aliens have about $4 trillion in deposits. The IRS would collect that information, and share it with countries which have tax information exchange agreements with the United States. We already do this for Canadian citizens, but not others.

Opponents of the regulation, including three of the four witnesses present at the hearing today, argue that it will cause large amounts of capital to flee the United States. Rebecca Wilkins, the only witness present to testify in favor of the regulation, correctly replied (repeatedly) that although there are $4 trillion in NRA deposits n the United States, roughly 3/4 of that sum belongs to institutions, such as banks, and would not be at risk of fleeing the country. Of the remaining $1 trillion, she pointed out that only a very small fraction of that would flee the country due to the new regulation.

This is where things got real bizarre. Ms. Wilkins pointed out the obvious: that the only depositors who would flee the country because the IRS has information on their depositors are those who don’t want the IRS to know how much money they have stashed away in bank accounts. One can imagine that this is consequential for tax evaders and all sorts of organized crime such as drug cartels, human traffickers, and arms dealers. Their money, a tiny fraction of the overall deposits, would move offshore. Ms. Wilkins said, “Make no mistake, the United States is a tax haven for citizens of other countries.”

The three majority witnesses, and many friendly representatives, flatly denied this. They claimed that this information would encourage kidnapping of wealthy Latin American depositors (even though the IRS doesn’t exactly publish this information on Facebook), cause “Half a trillion dollars” to flee the country, and all sorts of other harms. Ms. Wilkins was accused by Representative Posey of Florida of advocating for the interests of “Venezuela, Cuba, and eventually North Korea and Iran.”

It wasn’t always a pretty hearing, but its an important issue for anyone who cares about cracking down on global tax evasion. The new IRS regulation would be a significant step toward ending the United States’ status as a tax haven. I highly recommend reading Rebecca Wilkins’ testimony, and watching the video linked to above.

Image License:  Some rights reserved by slangevi

Obviously the U.S.government doesn’t have the authority to mandate these requirements to all foreign banks. Instead, the IRS will enter into voluntary agreements with foreign financial institutions, which will require them to identify U.S. accounts and report certain information about these accounts to the IRS. Financial institutions that do not enter into these agreements lose certain privileges with the U.S. government. For example they may be subject to withholding on certain types of payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and passthru payments. All foreign financial institutions must enter into these agreements by June 30, 2013 to ensure they will be identified as participating.

Of course, this leaves something of a loophole. U.S.taxpayers can still open hidden accounts in a complicit foreign bank that holds only international investments. So people can keep cheating—as long as they are willing to sell their direct and indirect U.S.assets. Otherwise, though, this law shows promise for stemming the tide of tax evasion.

There’s been a great deal of backlash against this law, particularly from foreign banks (surprise) and even the outspoken foreign financial minister of Canada. Some of these concerns are based in logic and fact. Others are not. The Obama administration has remained pretty steady on the issue, but still senior bank officials have still pleaded with Treasury Secretary Timothy Geithner to modify the law.

One of their arguments against the law is that it will be cripplingly costly. They claim the reporting requirements will cost “billions of dollars.” One study estimated the costs would be between $30 million and $80 million per bank (of course, this study was conducted by Crossbridge, a London-based consultancy whose major clients are all from the investment banking industry). But banks aren’t taking any chances. Disclosure records already show that Switzerland’s Credit Suisse, the UK’s Barclays, and Canada’s TD Bank have together spent millions of dollars lobbying to amend the law. (Why these banks should be able to buy their way into a significant voice in the American democratic process is frankly beyond me.)

Anyway, instead of all this back-and-forth and yelling and screaming it would be much better if a firm actually asked foreign banks how much they are likely to spend on compliance on FATCA. Of course, foreign banks may overestimate this number (it isn’t really in their interest to underestimate it), but in a survey setting, they may also be inclined to tell the truth.

Thankfully for all of us who are interested in facts and not just screaming—someone has conducted such a survey.

On Monday RBC Dexia Investor Services released results from a survey called “A Temperature Check: Who’s Ready for FATCA,” which polled 217 financial institutions. They found that “about 85 percent of the banks estimated the cost of complying with FATCA at up to $1 million and 54 percent expect to spend less than $100,000. Only 5 per cent of respondents are anticipating expenses over $5 million.”

Let me repeat that: over half of these foreign banks intend on spending less than $100,000 to comply with FATCA. That doesn’t sound crippling to me at all. In fact, given that three of these foreign banks have already spent millions lobbying against this measure, well, someone’s math just doesn’t add up. And this time it doesn’t look like it’s mine.

LONDON – In a sign of growing anxiety about tax competition that costs governments billions of dollars a year, international economic policymakers are exploring the need for a global crackdown on tax loopholes.

Experts at the Organization for Economic Co-Operation and Development are examining tactics that companies employ to exploit different tax rules among countries, and are assessing past efforts to rein in the practice known as tax arbitrage.

Angel Gurría, the OECD secretary-general, recently urged the world’s biggest economies to consider how “to limit the scope for gaming the system with multiple deductions, the creation of untaxed income and other unintended consequences of international tax arbitrage.”

The OECD is worried about the impact of tax arbitrage on competition, transparency and fairness, as well as lost revenue.

Earlier this year, Jeffrey Owens, the OECD’s top tax official, called for cooperation in dealing with the “the most costly and destabilizing instances of international tax arbitrage,” which he said can lead to “lost government revenues, wasted resources, increases in borrowing to finance the arbitrage and increased complexity.”

Past efforts to crack down on arbitrage have been controversial,with big companies accusing governments of trying to act as “global tax policemen.” In 2001, the business-friendly Bush administration criticized an OECD initiative to address what it termed “harmful tax practices,” saying it interfered with the right of countries to structure their own tax rules.

In December 2008, after the financial crisis struck, the Internal Revenue Service signaled a shift in attitude. IRS Commissioner Douglas H. Shulman [1], noted in a series of speeches over the following year that a “dizzying global environment” in tax arbitrage was challenging regulators.

One of the speeches came at a meeting of the OECD [2], whose 34 member states include Europe’s strongest economies, the United States, Japan and South Korea.

“All countries with real economies and real tax systems have a shared interest in reducing the kind of arbitrage that makes income disappear from the tax systems where the economic activity is taking place,” Shulman told an audience at George Washington University in 2009. “Tax arbitrage” encompasses a wide range of complex practices that companies employ to achieve tax credits or savings, often by shifting income among subsidiaries in different countries.

Arbitrage generally has mushroomed in the increasingly globalized economy, although it dimmed somewhat in the wake of the 2007-08 global financial crisis, which hit international capital flows.

Still, an appetite for aggressive tax planning remains.

Earlier this year, the U.K. treasury announced laws to close down “an aggressive tax-avoidance scheme” of “contrived circular transactions” by a dozen large businesses unidentified by the government. Hundreds of millions of pounds of tax revenue were at risk, the government said in a news release at the time.

For confidentiality reasons, the U.K. doesn’t disclose taxpayer identities or offer details about such cases.

The OECD last year highlighted its fears [3] about the ability of banks to use losses accumulated since the financial crisis — an estimated $700 billion, according to the OECD — as a tool for aggressive tax planning.

Among the concerns is “loss trafficking [3]”— schemes in which losses are sold to other companies to reduce their tax payments. In an August report, the OECD also warned about aggressive tax planning that involves the carrying forward of “vast” corporate losses as high as 25 percent of the gross domestic product of some countries. The OECD has also said that multibillion-dollar deals aimed at generating foreign tax credits encouraged a general buildup of leverage and led to tax distortions.

The concern was raised in a 2009 report by then-adviser Geoff Lloyd that pointed to the complex structures involving low-cost loans at the heart of some tax-arbitrage arrangements. Such financing provided “an unintended subsidy for cheap cross-border lending at the expense of the lender’s home state exchequer,” according to the report.

The OECD’s Owens sees tax distortions as possibly stoking financial instability.

Speaking at a Brussels conference in March, he said: “Tax was not among the root causes of the financial crisis. But tax measures may contribute in exacerbating non-tax incentives to financial instability in the form of greater leverage, greater risk-taking and to a lack of transparency.”

Related stories:

• Did Barclays Help U.S. Banks Get Undeserved Foreign Tax Credits? [4]
• Government Claims AIG ‘Gamed the Tax System’ [5]
• Corporations Couldn’t Wait to ‘Check the Box’ on Huge Tax Break [6]
• Documents: Browse the documents. [7]
• Interactive: Tax wars: Looking at STARS. [8] (FT.com)

This story was co-published by ProPublica and the Financial Times.

LONDON / WASHINGTON – U.S. District Judge Patrick J. Schiltz of Minnesota is an educated man. He earned his law degree from Harvard, won a coveted clerkship for Supreme Court Justice Antonin Scalia and taught the law for more than a decade before joining the bench in 2006.But when Wells Fargo, the retail banking giant, and the U.S. Justice Department squared off in his courtroom last year over the legality of a fiendishly complicated tax scheme known as “STARS,’’ even Schiltz quickly realized he was not equipped to parse the facts.“I fear I may finally have met my match,” the judge told the court. “We may need a translator in this case, someone who can help us to understand these complex transactions and understand the complex tax laws to put this into English for us.”

He is not alone. The growth of an arcane, intellectually demanding area of high finance that generated hundreds of millions of dollars for banks and multinational companies is being dissected from Minnesota to Washington, D.C., as the U.S. government pursues what it calls tax avoidance fueled by the use of artificial foreign-tax credits.

STARS — short for “structured trust advantaged repackaged securities” — were deals between U.S. banks and Barclays, one of the U.K.’s premier banks in London, that have come under particular scrutiny in bankruptcy, tax, district and claims courts.

At issue is whether the transactions had a legitimate business purpose or were designed specifically to generate improper U.S. tax credits.

Barclays emerged as a key player in creating strategies that worked asymmetries in tax systems. In the STARS deals in question, Barclays realized at least $800 million in tax savings from the U.K. government — benefits it shared with other parties in the deals, according to an analysis of U.S. court and Internal Revenue Service documents by the Financial Times and ProPublica.

Six U.S. banks — BB&T, Bank of New York Mellon, Sovereign (now a unit of Banco Santander), Washington Mutual, Wells Fargo and Wachovia (now a Wells Fargo subsidiary) — have been battling the government over tax credits they claimed through STARS. In one instance, government lawyers said STARS permitted BB&T to claim $1 in foreign tax credits for every 50 cents in tax, “grossly exploiting the tax laws [1].’’

BB&T, based in North Carolina, responded in court that it participated “to maximize profits’’ and not “to avoid or evade’’ taxes.

The U.S. banks all contend their deals had economic substance because Barclays provided them with billions in financing at below-market costs. But each arrangement involved a complex set of transactions, including creation of a trust and multiple subsidiaries, which also provided significant tax breaks.

The U.S. government, in recent court filings, contends that STARS was a highly complex tax-shelter transaction used by the U.S. banks to generate foreign tax credits. In court filings, government lawyers allege that the BB&T [2] and Wells Fargo [3] deals were a “sham.’’ In Wells Fargo’s case, they assert that STARS was designed so the U.S. bank’s “entire economic profit would be totally and exclusively sourced from U.S. foreign tax credits. [4]’’

Wells Fargo says in court papers [5] that its deal with Barclays was a lawful way to obtain reduced-cost financing for its ordinary business.

The U.S. banks involved in pending cases declined to comment. Washington Mutual has settled, agreeing in bankruptcy court last year to forgo $160 million in claimed tax credits. The other U.S. banks are seeking repayment for disallowed tax credits totaling more than $1 billion.

Barclays is not a party to the cases and declined to discuss client matters or comment on its U.K. tax savings. “Barclays complies with taxation laws in the U.K. and all the countries where we do business,” the bank said in a statement Sunday.

U.S. and British tax officials also declined to discuss individual cases, saying it is forbidden by law. There is no sign that British authorities are challenging STARS deals, and the U.K. appears to have had a net tax benefit from them. One court filing by Bank of New York Mellon says: “Barclays’ transaction structure was reviewed by the U.K. taxing authority.”

Revelations about the deals arise amid a broader political debate about corporate taxes and the ability of U.S. companies to compete globally.

As the 2012 election year looms, President Barack Obama is facing direct challenges from Republicans about how best to reduce the U.S. corporate tax rate — at 35 percent, one of the highest in the world — and why U.S. businesses hold an estimated $1.8 trillion in profits overseas.

The law allows U.S. corporations to defer paying taxes on profits earned elsewhere until they are brought home.

The STARS cases are a high-stakes battle for the IRS, particularly because the tax agency and the Treasury Department gave notice in 1997 that they would issue more regulations on foreign tax credits to curb “abusive tax-motivated transactions.’’ But the IRS and Treasury Department never issued new regulations and in 2004 withdrew the earlier notice.

Participants in the market say they believed the government was signaling then that it would not challenge such deals. So, when the Treasury Department and IRS proposed new regulations in 2007 and the IRS began turning down tax credits, companies were caught unawares.

The STARS disputes have produced a vast number of court documents that offer rarely seen details about the world of tax arbitrage [6] — deals that look to maximize profits by exploiting differences in countries’ tax systems.

More than three-dozen bankers, lawyers and accountants interviewed by the Financial Times and ProPublica would not speak publicly about transactions involving foreign tax credits, saying that to do so could jeopardize their jobs. But all characterized their work on such deals as legitimate and a sort of “cat-and-mouse” exercise: Revenue authorities would close a loophole, and financiers would look for another.

“Bankers looked on it as something to make money with. Young lawyers and accountants looked on it as a game,” one British lawyer directly involved in such deals said. “It is not hard to fool the parliamentary draftsmen.”

How the STARS deals worked

Foreign tax credits are designed in U.S. law to prevent double taxation of companies that do business overseas. Because U.S. companies are taxed on their worldwide income, they are allowed to claim a credit for taxes paid to foreign jurisdictions to keep their tax bills neutral.

But foreign tax credits have long been open to abuse. [7]

In STARS cases, for example, the government contends that U.S. companies pursued “foreign tax-credit generator” schemes to take reap credits even when there was no double-taxation. The tax agency is also pursuing cases involving non-STARS transactions in which companies indirectly borrowed funds from a foreign bank and received tax credits.

Such deals have wound down because of investigations and enhanced regulation and because the global credit crisis changed attitudes toward risk. But a look back at STARS reveals how the deals were born and the zeal of those financiers who have been — and continue to be — eager to push the boundaries of structured finance.

The U.K.-U.S. transactions were crafted with a certain degree of confidence and ease during the heady days of the mid-1990s, when financial firms on both sides of the Atlantic saw the potential for savings, said one participant.

“The U.K. equivalent of a foreign tax-credit generator scheme was a partnership deal,” he said. “What the U.S. calls foreign tax credit, we call double tax relief. What made the U.S.-U.K. deals so attractive were the English language, a foreign tax-credit system and the rules-based legal system.”

Court documents and an IRS legal analysis [8] of one transaction reviewed by the Financial Times and ProPublica show STARS deals generally work like this:

A U.S. bank transfers several billion dollars in income-producing assets to a trust and sets up a subsidiary as trustee in Britain. The bank sells shares in the trust to Barclays but promises to buy them back after a set number of years.

Barclays agrees to provide financing to the U.S. bank for less than the bank’s normal cost of credit, and it routes the money through the trust.

The banks say this structure at its core is simply a low-cost, secured loan. But the IRS says STARS went too far, creating a circular set of transactions that are principally designed to generate artificial tax benefits.

The U.S. bank’s trustee pays British tax on the trust earnings and claims a corresponding U.S. tax credit. Barclays pays some tax as well, but the arrangement also allows the U.K. bank an even larger tax benefit.

That’s because Barclays’ shares give it rights to nearly all the trust income, which the British bank is required to immediately reinvest in the trust. Barclays can deduct this reinvestment as an expense, reducing its U.K. taxes.

Barclays used part of the tax savings to discount the U.S. banks’ borrowing costs and kept the rest. In court filings, BB&T calls this discount an “offset,” while government lawyers call it a “kickback” from Barclays. When the deal expires, Barclays is repaid in exchange for the trust shares.

The STARS deals varied, but Barclays’ financing was always attractive. Sovereign says Barclays offered a loan [7] as much as 3.35 percentage points below normal cost in 2003. BB&T received $1.5 billion at 2.9 percentage points below normal cost in a five-year deal that began in 2002.

Wells Fargo, which received $1.25 billion at 2.50 percentage points below normal cost in 2002, told Judge Schiltz that the Barclays deal saved it “millions of dollars in interest expense each year.”

Other financial firms also participated in structured-finance deals. Barclays is presented in court files as the pivotal marketer of STARS to U.S. banks.

Court documents show Barclays worked at times with the global auditing firm KPMG; in one case, KPMG, the accounting firm Ernst & Young and the law firm Sidley Austin are described as having been involved in the design, development and marketing of the transaction. None of the three firms is the focus of an IRS challenge, and all declined to comment.

In the past decade, Barclays was known for a bold approach to tax arbitrage. The British bank’s structured-finance team was considered among the most aggressive of international moneymakers.

Its Structured Capital Markets unit was led in the 1990s by Roger Jenkins, whose focus on corporate tax planning reportedly made him one of London’s highest-paid bankers. Iain Abrahams, who joined the investing arm of the bank in 1995, was considered the wizard behind the deals, according to a half-dozen people who worked with or did business with him.

Abrahams remains a senior executive at Barclays Capital; Jenkins left in 2009. The government is seeking depositions from at least seven Barclays employees, court files show. The bank would make no employee available for an interview. Jenkins also declined to comment.

‘It became a cozy world’

The IRS and some of its counterparts elsewhere were unaware for years that banks and other financial firms were relying so heavily on foreign tax credits, bankers and officials said in interviews.

American International Group, better known as AIG, is characterized as a pioneer in structuring transactions with foreign tax credits, arranging deals as early as 1993, according to court documents.

At the helm of its development unit was a young Joseph Cassano, the same financier who headed the AIG finance unit that imploded in 2008. Companies such as Hewlett-Packard, the global technology giant, also engaged in the transactions. Banks were the most frequent partners.

His lawyer, Joseph Warin, said in an email that Cassano would not be interviewed.

A turning point came in the late 1990s when banks realized they could do deals with each other. Knowledgeable senior bankers said they were eager to move away from corporate customers, who were less adept at structuring complex deals.

“It became a cozy world,” said one. “You are dealing with your friends. You chat together, play golf together and move around each other’s institutions.”

Over time, the sharp reduction in interest rates encouraged much bigger deals to create the same tax benefits. In the early 1990s, the deals were totaling $150 million to $200 million; by 2003, they were 10- to 20-fold bigger, said two experienced bankers who were active in the market.

Banks also copied each others’ deals. “It was just like the credit boom,” said one prominent financier. Accountancy and law firms were involved, according to marketing documents and court papers reviewed by the Financial Times and ProPublica.

The authorities tried to catch up. In 2004, the U.K., United States, Canada and Australia formed the Joint International Tax Shelter Information Centre to curb abusive tax transactions. Soon after, the IRS was alerted to questionable transactions by its British counterparts within Her Majesty’s Revenue & Customs Office.

The U.K. later passed measures that caused a “large portfolio” of AIG transactions in Britain to be terminated, according to public filings. The United States began its own investigations and was helped by the international effort.

The joint tax center uncovered multiple cases that might have affected the U.S. tax base. The IRS was told about “things we would never have picked up or would have been picked up years down the road,” IRS Commissioner Mark Everson told the Financial Times in 2005.

By May 2006, he informed the Senate Finance Committee that the IRS was “aware of 11 structured-financing transactions with an estimated $3.5 billion at issue.” Not long after that, the IRS began denying STARS tax credits. In 2008, the IRS noted in a memorandum that foreign tax-credit deals had caused a “significant drain on the U.S. Treasury.”

Bankers and advisers say that tax-driven structured finance is now a fringe activity. Bill Dodwell, head of tax policy at the auditing firm Deloitte, said that in the current financial climate, “I don’t think aggressive planning will come back seriously for years and years.”

Dave Hartnett, permanent secretary for tax for Her Majesty’s Revenue & Customs in Britain, sees closer cooperation among tax authorities as helping to quell the deals. But they also recognize the market forces at play, he said.

“There has been increased tax transparency from many banks,” Hartnett said. “But have foreign tax-credit generators been closed down completely? No, I don’t think so.”

The international task force, he said, is still “busy exchanging information.”

–

Vanessa Houlder covers taxation and Megan Murphy covers investment banking for the Financial Times in London. Senior reporter Jeff Gerth is in Washington, D.C.

Related stories:

• Government Claims AIG ‘Gamed the Tax System’ [9]
• Corporations Couldn’t Wait to ‘Check the Box’ on Huge Tax Break [10]
• Momentum Builds for Global Crackdown on Tax Loopholes [11]
• Documents: Browse the documents. [12]
• Interactive: Tax wars: Looking at STARS. [13] (FT.com)

The IRS plan would require American banks to report interest paid to foreign citizens who live outside the United States and who have deposits in U.S. banks. This new requirement would actually put foreigners on level footing with U.S. permanent residents, who under current law, must report their bank deposits to the IRS and pay taxes on the interest they earn. I do this every year. If you’re an American, you probably do, too. Foreigners who don’t live in the United States, however, don’t have to report their U.S. bank deposits to the IRS. As Senator Carl Levin has put it: “Foreign account holders should be treated the same as – not better than – U.S. citizens.”

Meeks and Posey, however, are adamant that foreigners should not lose their special status in the eyes of the IRS. Their bill would block the IRS from following through with its efforts (which, by the way, would only require foreigners to report these deposits, it has nothing to do with paying American tax).

As Heather Lowe, Global Financial Integrity’s Legal Counsel and Director of Government Affairs, has noted:

It is absurd that banks are required to report account information for U.S. citizens and legal residents to the U.S. government, but not information on the U.S. accounts owned by people who aren’t living here. In addition to posing multiple national security risks, this lack of reporting hampers the U.S. government’s ability to comply with our international tax treaty obligations and makes it even more difficult for law enforcements to keep the proceeds of international drug trafficking, money laundering, corruption, terrorist financing and other crimes out of the U.S.

This all raises one obvious question: why? Why would two U.S. Representatives attempt to weaken the power of the IRS in the best interest of foreigners? Senator Levin believes “It’s a mystery…why any member of Congress would try to protect the anonymity of foreign bank account holders.”

Rep. Meeks claims his reasoning is to help the American economy. In a statement he professed: “At a time when our economy is experiencing a nascent recovery, the last thing we want to do is discourage foreign investment in the United States.” But this line of reasoning is bizarre; the numbers simply do not support it. as Rebecca Wilkins, Senior Counsel for Federal Tax Policy at Citizens for Tax Justice, noted in her May testimony at an IRS hearing on the issue:

The claims of dire economic consequences are completely unfounded. There is no foundation that billions of dollars of deposits will leave the U.S. if these rules take effect. It’s estimated that foreigners have invested roughly $10 trillion in the U.S. economy. Only $4 trillion of that is in banks. Three-fourths of that is in the name of foreign governments, international and regional organizations, foreign banks and foreign government officials. Of the less than $1 trillion left, only the amounts held in the names of individuals are subject to this rule and I believe that only those people who are evading tax will move their money as a result of this regulation.

So then what could it be? Here’s an idea. According to Open Secrets, Representative Meeks was of received at least $85,000 from financial and credit companies for his reelection campaign in 2010, making him the House’s second largest recipient of campaign funds from these institutions. Moreover, he received at least $576,000 from finance, insurance and real estate interests; more than half of his total political contributions during the period. Posey, similarly, earned $251,000 from this sector.

That seems to settle that little mystery right up.

So just so we’re clear. Meeks and Posey, two officials elected to represent the interests of U.S. citizens, have introduced a bill that represents the interests of foreign money launderers, tax evaders, terrorist financers, and, perhaps, big banks. If I were a constituent of one of these districts, I would take a long, hard look at my representative in Washington and ask: who is this man and whose interests does he really have at heart?

Global Financial Integrity

WASHINGTON, DC – The U.S. Treasury Department is finalizing a regulation (REG-146097-09) that would require that the interest earned on the U.S. bank accounts of non-resident aliens be reported to the Internal Revenue Service (IRS), as is currently required for U.S. citizens. The proposed IRS regulation has been touted as an important tool in the fight against international tax evasion, money laundering, drug trafficking, corruption, and terrorist financing.  However, a small group of legislators have introduced a bill (H.R. 2568) that would prevent the Treasury from taking such action.

“It is absurd that banks are required to report account information for U.S. citizens and legal residents to the U.S. government, but not information on the U.S. accounts owned by people who aren’t living here,” said Global Financial Integrity Legal Counsel and Director of Government Affairs Heather Lowe. “In addition to posing multiple national security risks, this lack of reporting hampers the U.S. government’s ability to comply with our international tax treaty obligations and makes it even more difficult for law enforcements to keep the proceeds of international drug trafficking, money laundering, corruption, terrorist financing and other crimes out of the U.S.”

The lawmakers behind H.R. 2568 claim that the new IRS regulation will place “more than $10 trillion in passive foreign investment in the U.S. economy at risk… force an exodus of much-needed capital, hamper the resurgence of the U.S. financial sector, [and] harm our fragile economic recovery…”  However, as Rebecca Wilkins, Senior Counsel for Federal Tax Policy at Citizens for Tax Justice, noted in her May testimony at an IRS hearing on the issue:

The claims of dire economic consequences are completely unfounded. There is no foundation that billions of dollars of deposits will leave the U.S. if these rules take effect. It’s estimated that foreigners have invested roughly $10 trillion in the U.S. economy. Only $4 trillion of that is in banks. Three-fourths of that is in the name of foreign governments, international and regional organizations, foreign banks and foreign government officials. Of the less than $1 trillion left, only the amounts held in the names of individuals are subject to this rule and I believe that only those people who are evading tax will move their money as a result of this regulation.[1]

“If the Treasury regulation is adopted, some foreigners engaging in tax evasion or other criminal acts may choose to move their funds out of their U.S. accounts to avoid any possibility of being groused to the tax authorities in their home countries, but even that doesn’t necessarily mean that U.S. banks will lose that capital,” stated Ms. Lowe.  “If a person wants to keep their money in U.S. dollars because of the stability of our currency, even if they open a U.S. dollar account in the Caymans or Jersey, that money must be held in that Cayman or Jersey bank’s correspondent account in a U.S. bank.  That capital would remain in the U.S. system.”  The proposed rule was published in January 2011. Previous attempts by Treasury to implement similar rules in 2001 and 2002 were also opposed by those who feared that such measures would drive away foreign investment.

“We have made a lot of progress since 2002 in understanding how U.S. banks, as part of the international financial system, must do their part to prevent money laundering, terrorist financing and tax evasion,” said Lowe.  “Understanding who keeps their money in U.S. banks and why is an important part of our ability to detect and respond to threats to our national security and our economic stability.  We strongly encourage lawmakers to consider all aspects of this issue and look more closely at any claims that this regulation would put massive amounts of U.S. capital at risk.”

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Contact:

Clark Gascoigne
cgascoigne@gfip.org
+1 202 293 0740 ext.227

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Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

For additional information please visit www.gfip.org.

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WASHINGTON – The Internal Revenue Service is giving more time to Toronto-Dominion Bank (TD), Aegon NV (AGN) and other banks based outside of the U.S. to implement a controversial tax reporting rule.

In guidance issued yesterday on the Foreign Account Tax Compliance Act, the IRS didn’t address some of the central questions that have caused financial institutions to fight the proposal. For instance, one of the rule’s most complex provisions — a requirement to withhold 30 percent from payments that might have indirectly originated in the U.S. — remains in the proposal.

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Tim Bonnemann/Flickr*

If I told you that while the United States is engaged in a costly war against illegal drugs and the vicious cartels that traffic them, U.S. banks are willfully flouting U.S. and Mexican laws and helping these cartels launder their money, would you believe me?

For decades the U.S. has served as a safe haven for the ill-gotten finances of corrupt foreign leaders and their ilk. Former foreign government ministers, military leaders, and corrupt heads of state have mansions, businesses, and bank accounts here. The banks who facilitate much of these activities are required by law to conduct “due diligence” in determining the source of funds for these “politically exposed persons,” but compliance is spotty.

A recent scandal involves Wachovia, now owned by Wells Fargo, in which Wachovia was found to have laundered (and profited off said-laundering) $378.4 billion in drug money for Mexican drug cartels. It is just the most recent in a string of examples of the onerous dynamic between U.S. banks and Mexico’s criminal element.

In a letter dated February 9^th, 2009, Mexican Finance Secretary Agustin Carstens makes the case to U.S. Treasury Secretary Timothy Geithner for automatic exchange of banking information between the two countries:

In continuing these efforts, both fiscal and law enforcement, I believe that one of the key elements of information that Mexico and the United States should begin sharing is the one pertaining to interest paid by banks of one country to residents of the other. Either because some of our taxpayers are simply moved by a tax avoidance motive, or more dangerously, criminals want to hide in one of our countries the cash they obtained from illicit sources in the other, both find a way to achieve their goal simply by opening bank accounts in the other countries’ banks. Moreover, due to the fact that the United States does not tax interest income paid by banks to non-resident aliens, and both countries do not have a solid and reliable mechanism to verify the actual residence of foreign depositors, we simply are allowing both the tax avoiders and the criminals to move their money untaxed and benefit from it. As you are aware, Mexico and the United States regularly exchange information, on a case-by-case basis, in accordance to our bilateral Tax Treaty. We also exchange bulk information on interest payments (between corporations), dividends and royalties. However, we do not exchange information on interests paid by banks from one country to residents of the other country. Canada and the US implemented such mechanism years ago, Mexico and Canada began exchanging such information years ago as well. Being the world’s largest trading block under the NAFTA, and fighting considerably higher security threats than a decade ago, I truly believe that we should enhance our cooperation and strengthen our capacities to protect our peoples and wealth. The exchange of information on interest paid by banks will certainly provide us with a powerful tool to detect, prevent and combat tax evasion, money laundering, terrorist financing, drug trafficking and organized crime.

A quote by Jeffrey Sloman, the federal prosecutor in charge of the Wachovia case, sums up the bank-criminal dynamic nicely: “Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations.”

Wachovia’s punishment for all of this bad behavior? A forfeiture payment to the federal authorities of $110 million and a $50 million fine—a miniscule amount in comparison to the $420 billion they allowed to pass through their bank without subjecting it to money laundering controls, or to their $12.3 billion profit for the year 2009. And nobody went to jail for this, not even the executives who ignored the whistle blowing efforts of certain courageous employees concerned about the lack of AML controls in place, going so far as to fire one of them for speaking out.

In addition to Wachovia, Bank of America, HSBC, Citigroup, Bank of Credit and Commerce International, and American Express Bank International have all had their own recent money-laundering scandals. Despite the high profile nature of many of these scandals, prosecutions under the Bank Secrecy Act or other federal laws remain scarce. The Justice Department has instead dealt with these sorts of situations through the use of deferred-prosecution agreements and fines, such as the one Wachovia was subject to.

This may change soon. The U.S. Treasury has recently proposed a rule known by insiders as the “Reporting on Non-Resident Alien Accounts” rule, which would require banks to provide the U.S. government with information on all non-U.S. person account holders similar to information provided by U.S. citizen/resident taxpayers on a 1099 form. (The U.S. government does not currently collect this information so they have no idea how much money is held in U.S. banks by foreigners, nor do they have any idea who those foreigners might be.  This means that terrorists could be hiding their money in the U.S., and we could be missing a terror threat right under our noses.) You thought finding Osama bin Laden was hard? Imagine trying to track his and al-Qaeda’s money through shell companies, subsidiaries, and false names when U.S. banks don’t even know for whom law enforcement is looking, or worse, when U.S. banks are looking the other way and allowing criminal money to flow willfully through our financial system. The benefits of this new rule should be obvious – the U.S. will stop shooting itself in the foot when it comes to fighting terrorism and drug trafficking.

* Image license:  Some rights reserved by planspark

WASHINGTON, DC – The U.S. Treasury Department will hold a hearing tomorrow on a proposed rule requiring banks to report information to the Internal Revenue Service (IRS) on bank accounts held by non-U.S. residents. Currently, U.S. banks are not required to give the U.S. government information about these types of accounts.

“It is absurd that our government requires banks to report information for U.S. citizens and legal residents, but not for the accounts owned by people not living here,” said Global Financial Integrity Legislative Affairs Director Heather Lowe. “In addition to posing multiple national security risks, this lack of reporting hampers the U.S. government’s ability to comply with tax information exchange agreement treaty obligations with other countries and hamstrings law enforcements’ ability to keep the proceeds of international drug trafficking, money laundering, corruption, terrorist financing and other crimes out of the U.S.”

The proposed rule was published in January 2011. Previous attempts by Treasury to implement similar rules have been blocked by those who fear that such measures would drive away foreign investment. A February 2010 Senate investigation found that millions of dollars in criminal money were finding their way into the U.S. every year, posing a massive security risk and abetting international criminal activity.

Senator Carl Levin, whose Permanent Subcommittee on Investigations conducted the investigation and subsequent hearing, commented in the February hearing’s opening remarks, “those engaged in large-scale corruption want to put their money in a modern financial system that can store, protect, invest, and transfer their funds efficiently. They want access to U.S. banks. And it is our job to stop them and keep foreign corruption out of the United States.”

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Contact:

Monique Perry Danziger
mdanziger@gfip.org
+1 202 293 0740 ext. 222

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The Task Force on Financial Integrity and Economic Development addresses inequalities in the global financial system that penalize billions of people, and advocates for improved transparency and accountability.

Global Financial Integrity is a  coordinating committee and founding member of the Task Force on Financial Integrity & Economic Development .

For additional information please visit  http://www.financialtaskforce.org .