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2018 FSI Ranks United States as Second Largest Secrecy Haven | FATCA

Paradoxically, while demanding that other countries comply with FATCA, the United States itself has become the second largest secrecy haven in the world according to the Financial Secrecy Index (“FSI”) released by the Tax Justice Network (“TJN”) at the end of January of 2018. Let’s explore why the 2018 FSI considers the United States a Tax Haven.

What is 2018 FSI?

The TJN’s FSI is considered to be one of the most comprehensive assessments of secrecy of financial centers. It is published every two years using independently verifiable data. Its methodology is based on the European Commission’s Joint Research Center. The 2018 FSI, however, is not considered to be influenced by any political considerations.

The FSI is based on various criteria which is updated with each publication. The assessment of a country’s financial secrecy includes such consideration as: requirement to identify beneficial owners of companies, trusts and foundations; whether annual registries are made available to the public in an online format; the extent to which the countries’ financial secrecy rules are forced to comply with the anti-money laundering standards, and so on.

In order to create the index, a secrecy score is combined with a figure representing the size of the offshore financial services industry in each country. This is expressed as a percentage of global exports of financial services. The responsibility for bigger transparency increases with the size of the financial services industry of a country.

In 2018, new indicators where added to what are now considered 20 Key Financial Secrecy Indicators “KFSI”. The 2018 FSI new factors ask whether a jurisdiction in question provides for public register of ownership and annual accounts of limited partnerships; public register of ownership of real estate; public register of users of freeports for the storage of high value assets; protection against prison for banking whistleblowers; harmful tax residency and citizenship rules; and other factors.

2018 FSI Placed United States as Second Largest Secrecy Haven Among the Top 10 Countries

Based on the consideration of all of these factors, including KFSI, the 2018 FSI placed United States as the second largest secrecy haven among the top ten countries. Here is the full list of top ten countries:

1. Switzerland
2. United States
3. Cayman
4. Hong Kong
5. Singapore
6. Luxembourg
7. Germany
8. Taiwan
9. UAE
10. Guernsey

What this means is that the United States is now the country that, with the exception of Switzerland, most contributes to financial secrecy in the world.

Reasons Behind the US Rise in the 2018 FSI Ranking

The second rank of the United States was assigned due to its growing share of the offshore financial services industry. According to 2018 FSI, the US market share of the offshore financial services industry is 22.3%. It was 19.6% in 2015. In fact, in order to occupy the second place in the 2018 FSI, the United States displaced such a notorious offshore haven as the Cayman Islands.

There are other objective reasons and comparative reasons for the US rise to the second place of the 2018 FSI. The main comparative reason is the European Union’s lead in the transparency initiatives. The EU is now the definite leader in combating financial secrecy.

The objective reasons are various. The United States does not have any beneficial ownership registries. It also lacks the country-by-country reporting of corporate profits (although, this may change). Finally, the United States continues to refuse to join the OECD’s Common Reporting Standard (“CRS”).

The Second Place in the 2018 FSI Points to Dubious Cost-Benefit Analysis

The second place in the 2018 FSI is not accidental. Rather, there is a cold, though morally dubious, cost-benefit calculation behind it. On the one hand, the United States was the country that really propelled the global fight against bank secrecy in the years 2008-2014. It trampled all over the vaulted Swiss Bank Secrecy laws when it came to its pursuit of US tax evaders, enacted the revolutionary FATCA legislation, forced the vast majority of foreign financial institutions to share information (including beneficial ownership information) with the IRS concerning US owners of foreign accounts, and engaged in a number of other activities to increase the worldwide financial transparency with respect to US taxpayers.

On the other hand, all of the US efforts to combat bank secrecy were not a fight for transparency ipso facto. Rather, the US government was only interested in fighting bank secrecy in so far as it concerned US taxpayers. With respect to its own bank secrecy laws concerning foreigners who wish to invest in the United States, the US government is on par and even exceeds some of the most secretive tax havens.

In other words, when it comes to fighting US tax evasion, the US government is an innovative champion. With respect to attracting investment in the United States, the same US government seems to do everything possible to turn the United States into a tax haven. This is precisely why it never joined the CRS.

While the US government seems to be acting in the name of the national self-interest, there is one huge problem that this policy creates. Currently, the elites of the most corrupt regimes, mafias and cartels of all stripes, narcotics dealers and other criminals can see the advantage of using the United States as a haven for illicit financial flows, including money laundering and funding of terrorism. There is also an increased danger that the corruption created by one part of the US financial policy may spread to other aspects of our society.

In other words, the current US bank secrecy policy seems to be in contradiction with other stated policies which attempt to specifically target the aforementioned criminal activities. This contradiction is an easy target for critics of the US financial policy and may contribute in the future to potential reversals of the current gains in international financial transparency.

Sherayzen Law Office will continue the monitor the developments in the US bank secrecy laws.

Swiss Voluntary Disclosures Rise as Swiss AEOI Compliance Nears

The voluntary disclosures by Swiss taxpayers jumped dramatically in 2017. The most likely reason for the increase is the fact that the Swiss government started to collect information under its numerous Automatic Exchange of Information (“AEOI”) agreements. Let’s analyze in more detail this connection between the Swiss voluntary disclosures and the Swiss AEOI Compliance.

Swiss AEOI Compliance: Increase in Swiss Voluntary Disclosures

The increase in Swiss voluntary disclosures between 2015 and 2017 is undeniable. The Swiss said approximately 350,000 voluntary declarations were made in 2016, compared to 328,000 in 2015. While the numbers for 2017 for the entire country are not available, we can extrapolate the 2017 numbers based on the canton of Zurich.

On January 4, 2018, the canton of Zurich reported that there were almost three times as many of voluntary disclosures of unreported assets by Swiss taxpayers in 2017 than in 2016. A total of 6,150 voluntary disclosures were submitted in 2017 whereas only 2,100 voluntary disclosures were made in 2016. The disclosures brought in about 104 million Swiss francs of additional tax income in 2017; the 2016 number was only 85 million Swiss francs.

The Swiss government also stated that the 2017 voluntary disclosures concerning ownership of real estate in Italy, Portugal and Spain were especially high.

Swiss AEOI Compliance Has a Direct Impact on Swiss Voluntary Disclosures

The connection between Swiss AEOI compliance and the increase in the voluntary disclosures is obvious. In fact, the cantonal government of Zurich directly stated that it attributed the jump in voluntary disclosures to the Swiss AEOI agreements, especially those related to the EU countries.

Already in 2017, the Swiss government started collecting financial information about Swiss taxpayers in order to turn it over to its partner jurisdictions under the Swiss AEOI agreements. The exchange of information under the Swiss AEOI compliance obligations is scheduled to begin in the fall of 2018 for the calendar year 2017 and 2019 for the calendar year 2018.

The Swiss AEOI compliance obligations are very broad due to the fact that Switzerland signed AEOI agreements with 53 jurisdictions already, including the European Union. The European Union is considered to be a single jurisdiction even though it consists of twenty-eight countries. The EU-Switzerland AEOI agreement was approved by the Swiss Parliament in 2016.

The Connection Between Swiss AEOI Compliance and FATCA

As Sherayzen Law Office has repeatedly pointed out in the past, the passage of FATCA in the United States has completely changed the international tax landscape concerning international information exchange with respect to foreign accounts and other foreign assets. In fact, FATCA and the DOJ Program for Swiss Banks have completely destroyed the vaulted Swiss bank privacy laws (though, the 2008 UBS case made the first hole in this bastion of offshore privacy).

After seeing the success of FATCA with respect to US tax compliance, the rest of the world joined the party. The new Common Reporting Standard or CRS was the OECD’s response to FATCA with an ambition to force even more transparency than required by FATCA and making this transparency apply to the United States. The US government refused to join CRS, but it did not prevent the CRS into growing in as important of an international tax compliance standard as FATCA.

Additionally, the enforcement of FATCA had another side-effect: a rapid proliferation of the AEOI agreements, both bilateral and multilateral. The new web of AEOI agreements is growing larger with the passage of time forcing an ever greater international tax transparency. The recent Swiss AEOI compliance is just the latest example of this trend.

Will we ever see a reversal of this trend? It is a real possibility, but it is unlikely that it will be able to destroy the legal groundwork for greater tax transparency that has been laid out by FATCA, CRS and the AEOI agreements.

Rothschild Bank AG Signs Non-Prosecution Agreement

On June 3, 2015, the US Department of Justice (“DOJ”) announced that Rothschild Bank AG (Rothschild bank) have reached resolution under the department’s Swiss Bank Program.

Rothschild Bank Facts

Rothschild Bank was founded in 1968 and is headquartered in Zurich, Switzerland. Rothschild Bank offered services that it knew could and did assist U.S. taxpayers in concealing assets and income from the Internal Revenue Service (IRS), including code-named accounts, numbered accounts and hold mail service, where Rothschild Bank would hold all mail correspondence for a particular client at the bank. These services allowed certain U.S. taxpayers to minimize the paper trail associated with the undeclared assets and income they held at Rothschild Bank in Switzerland.

For a number of years, including after Swiss bank UBS AG announced in 2008 that it was under criminal investigation, and following instructions from certain U.S. taxpayers, Rothschild Bank serviced certain U.S. customers without disclosing their identities to the IRS. Some of Rothschild Bank’s U.S. clients had accounts that were nominally structured in the names of non-U.S. entities. In some such cases, Rothschild Bank knew that a U.S. client was the true beneficial owner of the account but nonetheless obtained a form or document that falsely declared that the beneficial owner was not a U.S. taxpayer.

Since August 1, 2008, Rothschild Bank had 66 U.S.-related accounts held by entities created in Panama, Liechtenstein, the British Virgin Islands, the Cayman Islands or other foreign countries with U.S. beneficial owners. At least 21 of these accounts had false IRS Forms W-8BEN in the file, which are used to identify the beneficial owner of an account. Rothschild Bank knew it was highly probable that such U.S. clients were engaging in this scheme to avoid U.S. taxes but permitted these accounts to trade in U.S. securities without reporting account earnings or transmitting any withholding taxes to the IRS, as Rothschild Bank was required to do.

Rothschild Bank also opened accounts for U.S. taxpayers who had left other Swiss banks that the Department of Justice was investigating, including UBS. Since August 1, 2008, Rothschild Bank had 332 U.S.-related accounts with an aggregate maximum balance of approximately $1.5 billion. Of these 332 accounts, 191 accounts had U.S. beneficial owners and an aggregate maximum balance of approximately $836 million.

Rothschild Bank Penalties and Disclosures

In accordance with the terms of the Swiss Bank Program, the Rothschild bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations. Nevertheless, Rothschild Bank will pay a penalty of $11.51 million.

Rothschild Bank also made numerous disclosures of various information regarding US-held accounts.

Consequences of Rothschild Bank Non-Prosecution Agreement for US Taxpayers

The most immediate impact of Rothschild Bank Non-Prosecution Agreement will be felt by US accountholders who wish to enter OVDP after June 3, 2015 – their penalty rate will go up from 27.5 percent of the highest value of their foreign accounts and other assets included in the OVDP penalty base to a whopping 50 percent penalty rate.

Furthermore, the US taxpayers with undisclosed accounts which were related in any way to Rothschild Bank face an increased risk of IRS detection due to transfer information turned over to the DOJ by Rothschild Bank. “The days of safely hiding behind shell corporations and numbered bank accounts are over,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Department of Justice’s Tax Division. “As each additional bank signs up under the Swiss Bank Program, more and more information is flowing to the IRS agents and Justice Department prosecutors going after illegally concealed offshore accounts and the financial professionals who help U.S. taxpayers hide assets abroad.”

Finally, the rest of the US taxpayers with undisclosed accounts must contemplate a potential future that their accounts maybe subject to IRS discovery if the Program for Swiss Banks is extended to other countries. This possibility is increasingly real when one takes into account the impact FATCA has had on the global international tax reporting landscape.

What Should US Taxpayers with Undisclosed Foreign Accounts Do?

If you have undisclosed foreign account and other foreign assets, you should immediately commence the review of your voluntary disclosure options. Since the introduction of the Streamlined Procedures, the IRS has opened up a world of reduced penalties to various non-willful taxpayers. Willful taxpayers should realize that, the longer they wait, the worse their tax position may become.

In order to do your voluntary disclosure properly, please consult Mr. Eugene Sherayzen, an experienced international tax lawyer of Sherayzen Law Office. We have helped hundreds of US taxpayers worldwide and we can help you.

Contact Us to Schedule Your Confidential Consultation Now!