Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Apr 04
2014

My, What Long Arms You Have, Uncle

Here’s a visual: Uncle Sam extending his arms around the world, reaching out for his citizens, wherever they may be. He may resemble a candy-striped Gumby, with disproportionately long rubbery arms spanning the globe. The visual is not an endearing one to many Americans abroad. They do not see Uncle Sam’s reach as an embrace, but rather as a stronghold. And a close-up of the visual will show that not only is Uncle Sam holding his citizens, he is also clutching foreign institutions and sovereigns.

This visual describes how many perceive the U.S. following the enactment of the Foreign Account Tax Compliance Act (FATCA), a law that takes effect July 1, 2014, and is purported to increase accountability of U.S. taxpayers who have foreign financial assets. Unlike most countries, the U.S. taxes its citizens on income regardless of where the income was earned. Either through inattention or willful ignorance, many Americans have not fully complied with all U.S. tax laws and have not reported all foreign assets and income earned abroad. Desperate to shore up a massive budget deficit, in 2010 U.S. Congress decided to go after tax revenues on these foreign assets with the passage of FATCA.

FATCA followed on the heels of a 2009 settlement between the U.S. Justice Department and UBS AG in which the bank agreed to pay a hefty $780 million fine to avoid prosecution for allegedly fostering American tax evasion. A savvy Congress may have seen revenue potential both in ferreting out tax evasion and finding reasons to penalize financial institutions that fail to comply with U.S. law. FATCA and its implementing regulations shrewdly address both.

FATCA has two general reporting requirements: (1) U.S. individual taxpayers must attach Form 8938 to their income tax return, reporting information about foreign financial accounts and offshore assets valued over a specified threshold ($50,000 for a single filer, though a higher threshold applies to those living outside the U.S.) and (2) foreign financial institutions (FFIs) must register with the IRS and report information (mainly account balances) about U.S. accounts (including accounts of foreign entities with substantial U.S. owners). The FFIs may be required to withhold 30% on U.S. sourced payments to foreign payees if those payees do not comply with FATCA.

Here’s another visual: a massive splitting headache. FFIs agreeing to comply with FATCA will need to confirm the identity of all account holders, culling U.S. accounts for reporting purposes. In instances where local law conflicts with FATCA, e.g., when accounts are located in countries with bank secrecy laws, FFIs will need to ensure account holders sign waivers to allow reporting of their information. Many FFIs will need to institute a process to withhold 30% of certain payments from recalcitrant account holders and non-compliant FFIs.  So not only must these banks track their account holders, they may be required to track payments to those account holders and to other FFIs. They must stay abreast of which of their account holders and which FFIs are not compliant with FATCA. Then for the non-compliant, the FFIs will need to track U.S. payments to those and withhold 30% of the U.S.-sourced payments. Good luck.

The compliance and reporting requirements will be onerous. And the tediousness of compliance with the U.S. laws and regulations is only one piece of the legal framework FFIs must navigate. As mentioned above, they also have the overarching concern of compliance with their own country’s banking and privacy laws. A clash of laws may subject FFIs to class actions in their respective countries. While intergovernmental agreements between the U.S. and FATCA-cooperating countries, as well as local legislative efforts, may attempt to remediate problems of conflicting laws, FFIs must tread carefully.

Why would foreign banks, or foreign sovereigns for that matter, choose to subject themselves to the U.S.’s jurisdictional overreach? Why wouldn’t countries, especially those known for their bank secrecy laws, simply refuse to submit this costly program? The answer is simple. FATCA includes a steep penalty for non-participation. As mentioned above, there is a 30% withholding of any U.S.-sourced payments to FFIs that do not adhere to the law. A simple solution to avoid the penalty and the regulatory nightmare is to no longer hold U.S. accounts. And many Americans abroad are now struggling to find banks that will take their cash.  But other FFIs have chosen to work with the U.S. and their local government to ease compliance and implementation.

The financial pressure and regulatory burden to which the U.S. has subjected these foreign banks and sovereigns is the impetus for many intergovernmental agreements (IGAs) between the U.S. and other countries. The carrot for these countries to enter an IGA is that the U.S. will reduce the oversight requirements the law foists upon banks. For instance, an FFI in a country with an IGA may not have to track and withhold payments; they merely need to report on U.S. accounts. This regulatory ease is why many big banks in foreign countries have pressured their local governments to sign an IGA with the U.S. The end result is places known for bank secrecy, like Switzerland and Hong Kong, are buckling. Thanks to FATCA, bank secrecy will be a concept as antiquated as carriage rides.

But FFIs who think they are dodging a bullet by lobbying for an IGA in their country should think again. This merely opens the door to an increasing level of U.S. involvement in their affairs. We can expect the U.S. Justice Department to leverage its increased presence in FFIs to expand its enforcement initiatives.

Ifrah Law is a leading white-collar criminal defense firm that focuses on financial services.

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About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, healthcare, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen, David Deitch, and associates Rachel Hirsch, Jeff Hamlin, Steven Eichorn, Sarah Coffey, Nicole Kardell, Casselle Smith, and Griffin Finan. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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