Tax enforcement: US 0, Offshore 1. But the game's not over.
It's long been a bone of contention: the US wants to prosecute tax evasion but that's not an offence in many countries such as Switzerland and countries where there is no income tax. The US claims those countries are non-co-operative but the countries argue that their tax laws are their own affair. The US has given in. Sort of.
Switzerland has long returned applications from the US for information exchange in relation to US income tax evasion charges. That's for the simple reason that, to assist, there must be "commonality of offence." That is to say that there must be an equivalent offence in the country being asked for assistance as in the country making the request.
Switzerland does not have an offence of income tax evasion. So in response to requests from the US, the Swiss authorities have sent the request back. But they have, informally, told the US how to get that co-operation. Switzerland does have offences of failing to file tax returns or of filing incomplete or false statements. All the US has to do to, says Switzerland, is to prosecute suspected offenders for those documentary offences - which do exist in the US - and there can be co-operation.
Until now, the US has preferred to ignore that option and to paint Switzerland as the bad guy.
In fact, since 1970, the US has had laws on its statute books that fit the bill exactly: in addition to their IRS return, US taxpayers are required to submit what is known as an F-Bar - short for Foreign Bank and Financial Account Report.
It's a provision that is more honoured in the breach with very few F-Bars being filed annually. The requirement is specifically targeted at accounts held overseas including accounts for service and other companies over which US taxpayers have control and which hold balances of more than USD10,000.
It's not as if the US Government had forgotten about this provision: the penalty was USD100,000 for more than 30 years but in the USA PATRIOT Act the penalty was changed: since 2004, it has been the greater of USD100,000 or half the sum held in the account which is not disclosed.
But the IRS rarely bothered about this provision. Now, however, it has changed its priorities.
There is some logic in the timing: both the House and Senate are under the control of the Democrats. It is almost a foregone conclusion that a Democrat will be the next President and it is looking increasingly likely that that will be Obama.
Obama is one of the sponsors, with Senator Carl Levin, of the Stop Tax Havens Abuse Bill. Levin drafted the Correspondent Banking Provisions of the USA PATRIOT Act. He has seen ss311 and 312 of that Act and likes it. So the STHA Bill provides for any country, person or entity which refuses a request for co-operation from the US Treasury (for which in this context read IRS) to be subject to sanctions as being "of primary money laundering concern."
That Bill will be passed in some shape or form - it must be because part of it is to bring so called "hedge funds" within the counter-money laundering regime - so far, they are not subject to law or regulation requiring them to undertake even basic due diligence, much less adopt effective counter-money laundering measures.
The bringing to the fore of the F-Bar procedure is the first part of the armoury. Expect the Qualified Intermediary Status, which was a Clinton initiative adopted by Bush but not pushed hard, to regain some force. And with the passing of the Stop Tax Havens Abuse Bill certain to pass, at least in part, the stage is set for very aggressive tax enforcement.
That is going to mean far more IRS/Treasury requests for co-operation and information. And in circumstances that most countries will be powerless to resist and, if they try, there will be substantial risks to that course of action.
First published in World Money Laundering Report Online: News
Download PDF version of this page