Taxing times for anti-money laundering

By Marcus Killick, Chief Executive Officer, Gibraltar Financial Services Commission (01/06/2009)

It is very unusual to find a US Senate report that reads like the plot of a spy novel. Most are worthy, if dry. Yet on 16 July this year that pattern was shattered. Admittedly the title was hardly likely to be seen rushing off the shelves of Amazon. An accurate, if uninspiring title: 'Permanent Subcommittee on Investigations, Staff Report Tax Haven Banks and US Tax Compliance', the report alleges wholesale abuse by two European banks in helping certain US clients to evade taxes in the US. 

OK, not quite a John Grisham plot yet, but bear with me.  

The report claims that the US loses an estimated US$100 billion in tax revenue each year due to offshore tax abuses. In International Monetary Fund (IMF) figures, that equates to the GDP of Peru. The allegations in this instance alone covered thousands of US citizens and billions of dollars. 

According to a former employee of one of the banks (who has subsequently pleaded guilty to assisting in tax evasion), his bank systematically set out to get US clients and assist them to hide their assets overseas. They did this by helping their US clients structure their accounts to avoid reporting billions of dollars in assets to the Internal Revenue Service (IRS). Among other actions, they helped US clients establish offshore structures to assume nominal ownership of assets and allowed US clients to continue to hold undisclosed accounts that were not reported to the IRS. 

To establish the frequency of the visits the subcommittee obtained travel records from the Department of Homeland Security to identify bank employees who had visited the US to service clients.  

Roughly 20 client advisors made an aggregate total of over 300 visits to the US. On several occasions, the visits appear to have involved several client advisors travelling together to bank-sponsored events in the US. Some of these client advisors designated their visits as 'travel for a non-business purpose' on the customs declaration forms that all visitors must complete prior to entry into the US. Closer analysis by the subcommittee, however, revealed that the dates and ports of entry for such trips coincided with bank-sponsored events, suggesting the visits were, in fact, business related. 

The bank is currently under investigation by the US Securities and Exchange Commission, IRS, and the Department of Justice. In November 2007 the bank banned its bankers from going to the US. 

So we have whistle-blowers, bankers travelling to the US pretending to be on holiday, investigators using powers originally designed to stop terrorism to track these bankers' movements, crime and lots of cash. Now do you accept the Grisham analogy? 

The story, however, does not end here. Regardless as to what happens to the banks concerned (one senator has called for federal regulators to consider revoking the US banking licence of the bank in question), there are wider implications. 

The report makes a series of recommendations including extending the Patriot Act to allow the US Treasury to bar certain tax haven banks from doing business with US financial institutions. It also called for the Stop Tax Haven Abuse Act, laid before Congress as a bill in February 2007, to be introduced.  

The Act is material as one of its co-sponsors is Senator Barack Obama, who made specific reference to tax havens in his speech at the Democratic National Convention, saying: "Now, many of these plans will cost money, which is why I've laid out how I'll pay for every dime, by closing corporate loopholes and tax havens that don't help America grow." 

So what is a tax haven?  

According to another of the Act's sponsors, Senator Carl Levin: "A tax haven is a foreign jurisdiction that maintains corporate, bank, and tax secrecy laws and industry practices that make it very difficult for other countries to find out whether their citizens are using the tax haven to cheat on their taxes. In effect, tax havens sell secrecy to attract clients to their shores. They peddle secrecy the way other countries advertise high quality services."    


Among other initiatives the Act would create an evidential presumption that certain entities located in a proposed list of 'offshore secrecy jurisdictions' are beneficially owned by any US person who transfers assets to, or receives distributions from them. In other words all nominal ownership will be ignored. The presumption can be rebutted but no evidence for this will be accepted from a non-US person unless that person appears to testify in the proceedings. 

The Act would also go after the offshore secrecy jurisdiction itself. Currently the US Treasury has the authority under the Patriot Act to impose financial sanctions on foreign jurisdictions, financial institutions, or transactions found to be of "primary money laundering concern". The Act would authorise the US Treasury to impose the same sanctions on the same types of entities if it finds them to be "impeding US tax enforcement". In addition, it would add to the list of possible sanctions, the ability to deny foreign banks the authority to issue credit cards for use in the US. This brings tax evasion squarely into the firing line in the fight against money laundering.  

Given the political will that appears to be behind this initiative (though there are a number of opponents) and the need of the US and others to increase their revenue, this Act, or at least some variant on it, is likely to become law. US entities doing business with jurisdictions labelled as offshore secrecy jurisdictions will find it more difficult and more expensive.  

Even for those not on the list, other likely changes will increase the complexity of US business and the need to ensure full compliance with the requirements. Sending your bank staff to the US to see clients whilst dressed in Hawaiian shirts and pretending to be on a stag weekend simply will not cut it.