It is estimated that the United States suffers a revenue loss of approximately $100 billion per year from offshore tax evasion. ((Tyler R. Murray, The Eighth Amendment and Tax Evasion: Whether FATCA Non-Compliance Fines and FBAR Penalties are Excessive, 24 Wm. & Mary Bill Rts. J. 553, 553 (2015).)) In 2007, U.S. Department of Justice officials uncovered a $20 billion tax evasion scandal masterminded by the Swiss bank, UBS. ((Jane G. Song, The End of Secret Swiss Accounts?: The Impact of the U.S. Foreign Account Tax Compliance Act (FATCA) on Switzerland’s Status as a Haven for Offshore Accounts, 35 Nw. J. Int’l L. & Bus. 687, 696 (2015).)) The UBS scandal catapulted into the national spotlight the systematic processes used by foreign financial institution (FFIs) to help U.S. citizens evade their tax responsibilities. ((See id. at 695-98.)) To combat U.S. citizens and FFIs use of offshore loopholes, Congress introduced the Foreign Account Tax and Compliance Act (FATCA) in 2009. ((Id.))
This blog post first briefly outlines the basic provisions of FATCA as they apply to FFIs. Then, this post highlights the implications of the UBS tax scandal settlement. Finally, this blog predicts that the U.S. Internal Revenue Service (IRS) and the U.S. Department of Justice (DOJ) will use non-criminal FACTA provisions as building blocks for future criminal tax evasion and fraudulent reporting indictments.
President Obama signed FATCA into law on March 18, 2010 as a funding provision of the Hiring Incentives to Restore Employment Act (HIRE). ((Foreign Account Tax Compliance Act, IRS.gov. https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca (last updated Sept. 13, 2016); Murray, supra note 1, at 554.)) Congress and the President implemented FATCA to encourage tax compliance and to help close offshore tax loopholes. ((Crawford v. U.S. Dep’t of Treasury, No. 3:15-cv-250, 2015 WL 5697552, at 1* (S.D. Ohio 2015).)) The Act accomplishes these goals in two main ways. First, it encourages FFIs to enter into agreements with the U.S. government and to disclose basic identifying information regarding any of their accounts held by U.S. citizens. ((See id. at 2*.)) Second, it encourages U.S. citizens to report any offshore accounts in their name. ((See id. at 2*.)) It is important to note that FATCA construes FFI broadly to include foreign banks, investment funds, hedge funds, private equity funds, insurance companies, securitization vehicles and broker-dealers. ((Song, supra note 2, at 701.))
FATCA contains no criminal provisions. ((See Murrary, supra note 1, at 555.)) The Act, however, incentivizes compliance from FFIs and individual U.S. citizens through two separate 30% withholding taxes. If an FFI fails to enter into a FATCA agreement, a 30% withholding tax, paid to the IRS, applies to all the institution’s U.S.-sourced income. Additionally, any individual U.S. citizen with offshore accounts in a FATCA compliant FFI that fails to identify themselves as a U.S. taxpayer becomes subject to a required 30% withholding tax from the FFI in control of their account. ((Crawford, 2015 WL 567552, at 2*.))
The severity of the two 30% withholding taxes has ensured widespread compliance. ((Robert W. Wood, 10 Facts about FATCA, America’s Maifest Destiny Law Changing Banking Worldwide, Forbes (Aug. 19, 2014, 2:27 AM), http://www.forbes.com/sites/robertwood/2014/08/19/ten-facts-about-fatca-americas-manifest-destiny-law-changing-banking-worldwide/#3a888f7c1961.)) Foreign nations with strict privacy reporting laws have even gone so far as to create FATCA exceptions to these privacy laws by entering into intergovernmental agreements with the United States. To date, over 77,000 financial institutions and more than 80 nations have entered into FATCA agreements with the U.S. ((Id.))
The UBS Inspired DOJ Offshore Compliance Initiative
The UBS scandal came to light in 2007, when a former UBS banker, Bradley Birkenfeld, confessed to helping U.S. taxpayers evade paying millions of dollars in taxes. ((Song, supra note 2, at 696.)) Mr. Birkenfeld’s testimony led to a DOJ investigation that resulted in a 2009 deferred prosecution agreement in which UBS admitted guilt on charges of conspiring to defraud the government. ((18 U.S.C. § 371 (1994))) and agreed to pay a settlement amount of $780 million in penalties, fines, and restitution ((UBS Enters into Deferred Prosecution Agreement, U.S. Dep’t of Justice (Feb. 18, 2009), https://www.justice.gov/opa/pr/ubs-enters-deferred-prosecution-agreement.)) Scott Friestad, deputy director of enforcement at the SEC in 2009, called the scandal “one of the most egregious cases of its kind.” ((David S. Hilzenrath & Zachary A. Goldfarb, UBS to Pay $780 Million Over U.S. Tax Charges, Washington Post (Feb. 19, 2009), http://www.washingtonpost.com/wpdyn/content/article/2009/02/18/AR2009021802541.html.))
With the veil of offshore tax evasion secrecy pulled back, the UBS scandal kick-started an offshore tax compliance initiative campaign within the Tax Division of the DOJ. ((U.S. Dep’t of Justice, supra note 15.)) After UBS, at least fourteen additional major Swiss banks were criminally investigated by U.S. prosecutors for suspicion of aiding tax evasion ((Song, supra note 2, at 699.)) The DOJ’s tax compliance initiative remains one of the Tax Division’s top priorities to date ((U.S. Dep’t of Justice, supra note 15.))
FATCA’s Big Stick and FFIs
FATCA’s individual and institutional reporting requirements, combined with the Act’s 30% withholding tax, aid in the creation of an intricate and complex web of tax information. ((See Wood, supra note 10.)) It is likely that the DOJ and IRS will utilize FATCA’s informational web as the building blocks for future criminal investigations. For example, any non-compliant FFI that is identified in a compliant individual’s report(s) will likely become the focal point of future DOJ criminal tax evasion investigations, and vice-a-versa. Similarly, DOJ officials will be able to use the threat of individual criminal prosecution to leverage non-compliant individuals, identified through FFI reports, to highlight other non-compliant FFIs where they maintain additional accounts.
Congress crafted FATCA to encourage compliance by both individuals and FFIs through solely financial incentives. ((See Murrary, supra note 1, at 555.)) Nonetheless, the vast informational tax data FATCA reports create will allow the DOJ and IRS to identify both individuals and FFIs attempting to utilize existing tax loopholes, such as those identified in the UBS scandal. In this manner, FATCA will be the DOJ’s Tax Compliance Initiative’s most valuable tool in upcoming criminal tax evasion enforcement. FATCA is the DOJ’s newest big stick. ((See Wood, supra note 10.))
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