International Financial Transparency and Enforcement in 2014

  • Is this the end for Offshore Voluntary Disclosure?
  • Will FATCA become the International Standard for the Automated Exchange of Global Financial Account Information?
  • How is the U.S. Enforcing Criminal Tax Laws?

As more countries prepare to comply with the requirements of the Foreign Account Tax Compliance Act (FATCA), practitioners question how much longer the IRS will offer the Offshore Voluntary Disclosure Program (OVDP) to taxpayers who wish to come forward and become compliant regarding reporting of their offshore accounts.   As the requirements of FATCA are phased in for both foreign and non-foreign financial institutions, it seems there will soon be nothing left for taxpayers to voluntarily disclose.  Beginning in July 2014, new withholding and reporting obligations will begin for certain financial institutions leaving their accountholders without the secrecy they once enjoyed.(1)

Dozens of countries have entered into one of two model Intergovernmental Agreements (IGAs) over the past year.(2)  The U.S. Department of the Treasury has reported that it is in the process of finalizing even more IGAs with counties including Brazil, British Virgin Islands, Jamaica, Liechtenstein, Poland, South Africa and South Korea.(3)  Negotiations are also reportedly underway with many other governments including China, Hong Kong, Israel, New Zealand and South Africa.

In September 2013, the Organisation for Economic Co-operation and Development (OECD) proposed a global model for the automatic exchange of information and asked representatives of the G20 countries to design such a standard as a Common Reporting Standard (CRS).   In February 2014, the G20 Finance Ministers and Central Bank Governors met and reviewed the proposal for the annual automatic information exchange between jurisdictions.   The new standard is comprised of work previously conducted by the OECD, incorporating global anti-money laundering standards and crediting the intergovernmental implementation of FATCA for the movement toward the multilateral automatic information exchange.(4)  Like FATCA, the CRS requires certain financial institutions to provide greater access to tax authorities and to report on income earned in financial accounts.

A standardized reporting system would deter taxpayers from using offshore financial accounts to evade tax while providing financial institutions with a cost-effective and less burdensome reporting system to administer.

Once considered the premier tax haven country in the world, Switzerland now finds itself taking many avenues to avoid prosecution and encourage compliance with the United States.   In August 2013, the U.S. offered an amnesty program to certain Swiss Banks in which the banks had until December 31, 2013 to accept the offer and seek a non-prosecution agreement if they thought they may have violated tax laws(5).   In exchange for amnesty, the banks agreed to disclose all information about cross-border activities, provide detailed information about each U.S. person who had an account and to also provide information about other banks that accepted U.S. clients who may have promised secrecy to U.S. account holders.   Those banks who did not enter into the program may face criminal investigations and prosecution if found to have helped U.S. taxpayers evade tax.  The offer was made to more than 300 banks; 106 banks accepted the offer(6).

In March 2014, the Swiss parliament voted to provide foreign tax authorities with identifying information on accountholders with undeclared accounts in Swiss banks, without giving the accountholder advance notice if doing so would inhibit an investigation.  This is another sign that Switzerland is loosening its bank secrecy laws after facing the threat of OECD sanctions in 2013 and the need for compliance with the Global Form on Transparency and Exchange of Information for Tax Purposes.  The amendment to the Swiss banking secrecy law introduced into parliament as a revision of the Tax Administrative Assistance Act.(7)

Swiss banks that were not invited to participate in amnesty are making other arrangements.   Credit Suisse, for example, has reportedly increased the funds it set aside to avoid prosecution and resolve its tax dispute with the United States to approximately $1 billion.(8)

The United States still is not satisfied. Also in March 2014, Senators John McCain and Carl Levin, both key members of the Permanent Subcommittee on Investigations, wrote to the Department of Justice (DOJ) urging that it seek extradition from Switzerland of indicted enablers.  Of the various Swiss nationals charged with criminal conduct related to aiding and abetting U.S. tax evasion, extradition has not been sought in any case in the past five years, yet the DOJ charged 35 Swiss bankers and 25 financial advisors for crimes related to facilitating U.S. tax evasion.(9)

Most recently, the IRS and DOJ announced the indictment of a U.S. citizen and two Canadian citizens, residing in the Cayman Islands, who were charged with using foreign accounts to launder $200,000 in an undercover sting operation.(10)  Two of the defendants worked for an investment firm in the Cayman Islands with many U.S. clients; the third worked as an attorney at a law firm in Turks and Caicos, also with numerous U.S. clients.   According to the indictment, these defendants were in the business of creating layers of transactions so their US clients could launder criminal proceeds.  Richard Weber, Chief of the IRS Criminal Investigation Division, pledged the IRS' commitment to "unraveling complex financial and money laundering schemes and holding those accountable for creating mechanisms to hide assets offshore and dodge the tax system."(11)

At a news conference in New York, Kathryn Keneally, Assistant Attorney General of the Department of Justice's Tax Division, confirmed, "The days of waiting for a warning sign, such as a letter from a bank, are over."

While the IRS' Offshore Voluntary Disclosure Program remains viable, taxpayers are ineligible to participate if the U.S. authorities acknowledge already having their names.   The IRS and DOJ know that many U.S. taxpayers with undisclosed accounts remain undetected.   The State Department estimated in 2012 that 7.2 million U.S. citizens lived abroad, but only 825,000 reported foreign accounts in 2012 by filing Reports of Foreign Bank and Financial Accounts (FBARs).   The OVDP program imposes steep penalties but offers protection against criminal prosecution.  The IRS and DOJ are undeterred.   The IRS and DOJ remain committed to combating tax evasion, prosecuting taxpayers and promoters of tax evasion, including bankers, financial institutions and even governments.

The obstacle for many people in coming forward is the long and expensive process.    Taxpayers are still trying to figure out a way to avoid the 27.5% FBAR penalty without appreciating the real threat of criminal prosecution.   Taxpayers with offshore accounts are well-advised to be aware of the potentially limited amount of time to obtain relief through OVDP and to be aware of the pending international financial transparency.  The days of tax haven jurisdictions will soon end.


(1) http://www.irs.gov/pub/irs-drop/n-13-43.pdf

(2) http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx

(3) Id.

(4) http://www.oecd.org/ctp/exchange-of-tax-information/Automatic-Exchange-Financial-Account-Information-Common-Reporting-Standard.pdf

(5) http://www.justice.gov/tax/2013/txdv131311.htm

(6) http://www.reuters.com/article/2014/01/25/usa-tax-swiss-banking-idUSL2N0KZ0DZ20140125

(7) http://www.sif.admin.ch/dokumentation/00509/00510/00622/00624/00691/?lang=en

(8) http://www.chicagotribune.com/business/sns-rt-us-creditsuisse-litigation-20140402,0,4922294.story

(9) http://www.levin.senate.gov/newsroom/press/release/levin-mccain-urge-justice-department-to-seek-extradition-in-tax-evasion-cases

(10) http://www.justice.gov/opa/pr/2014/March/14-tax-302.html

(11) Id.