International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Tuesday, July 3, 2018

Will 2018Q4 see you ‘helping the authorities with their enquiries’? Guest Post by Haydon Perryman

Author Haydon Perryman may be contacted here via his website 

“Our FATCA compliance was complete some time ago; our CRS compliance is almost complete too.”

This is the kind of complacent, almost nonchalant, phrase heard rolling off the tongue of many a Compliance and Risk Officer.

While almost no Financial Institution is close, or anywhere near to close to FATCA and CRS compliance, because there has been a noticeable absence of enforcement in many jurisdictions, the industry is in the first stage of the Kübler-Ross model (otherwise known as the five stages of grief): (denial) apparently without consequence. Some have moved onto the third stage ‘bargaining’ with an interpretation of these regulations that can best be described as ‘entirely their own’.

 Many have not made the connection between

  • FATCA and the CRS,
  • two new offences introduced by the UK Criminal Finances Act 2017 (making it easier for HMRC to secure a conviction),
  • the extra-territorial nature of the UK Criminal Finances Act:
    • it applies to market participants worldwide and
    • applies to both evasion of UK taxes and also tax evasion worldwide
  • the EU and OECD ‘mandatory disclosure regime’ and
  • the closure of the US IRS Offshore Voluntary Disclosure Program[1] on 28th September 2018 (which required 56,000 taxpayers looking to avoid prosecution to give full disclosure to the US IRS of the names of banks and employees who allegedly facilitate tax evasion via offshore accounts).

A common practice of Change Managers is to categorise Compliance Programmes[2] as either Red, Amber or Green. Just like road traffic, Green indicates that all is well.

Because FATCA and CRS have seen little in the way of direct enforcement, it has become de rigueur to report FATCA and CRS as green (regardless of the actual level of FATCA and CRS compliance).

Consequently, we see in the industry an archipelago of FATCA and CRS programmes masquerading as green. In truth, these are what some in Change Management refer to as "Water Melons," i.e. green on the outside but red when you look into them.

So, the finance industry regards something it does not understand as safe and allows the problem to expand until it manifests itself as extremely dangerous. Déjà vu?

What market participant would want to state that the Emperor has no clothes, or rather, that it is significantly non-compliant with FATCA and CRS? It would be a pariah to its peers and may call unwelcome regulatory attention upon itself.

Perhaps many believe the regulator is a paper-tiger when it comes to FATCA/CRS enforcement on Financial Institutions. FATCA has been ‘in force’ since July 2014 but has been enforced never. (The Swiss banks that were penalised up to the end of 2016 were not penalised as a direct result of Title V of the HIRE Act aka ‘FATCA’.)

While the industry was content to regard the regulator as toothless, it looked away as the regulator sharpened its claws. Very few have linked this lack of enforcement and the new strict liability criminal offences for tax evasion with an offshore element applying from the 2017/18 tax year.

It is now far easier for Host Country Tax Authorities to secure a criminal conviction. Has there really been a lack of enforcement or have Host Country Tax Authorities silently made it much easier to hit their prosecution targets?

This applies not only to the evasion of UK taxes but tax evasion worldwide.

Meanwhile the EU and OECD have introduced the ‘mandatory disclosure regime’ to tackle tax evasion ‘head on’.

Some may still perceive that they have little to fear. They may be reassured by various internal reports that indicate that there are no ‘weeds in the garden’ (just plenty of fine greenery). Maybe those reports indicate that there were ‘weeds in the garden' but that those weeds have long since been permanently dispatched leaving nothing but a beautiful vista of lush green of various hues.

Perhaps in private many realise that despite the printer toners continuously having to be replaced because of the lavish application of green ink, that all is not as leafy green as it appears. But then, how would the regulator know that their particular institution is other than compliant? Isn’t there safety in numbers?

In IGA countries, some take solace in that unlike the US Treasury version of FATCA, the IGA Model 1 version of FATCA has no concept of the Responsible Officer and that Financial Institutions in IGA Model 1 jurisdictions, are not required to Certify FATCA compliance directly to the US IRS.

However, some see the clever twist that the IRS wrote into the plot via the Qualified Intermediary regime. If the Financial Institution is a Qualified Intermediary (QI) in an IGA country, the QI must make Certifications to the US IRS concerning, among other things, compliance with the local law implementing FATCA. The Financial Institution is almost never in compliance with this local-law, but it appears a great many seem not to know or are content to pretend not to know.

With so many in the industry celebrating at the well-attended, first stage of grief party, what could go wrong?

The volume of data is so vast that surely the tax authorities cannot isolate your particular institution, right? Surely if everyone just continues to drink the champagne, no one will ever have a headache?

On a sober note, the US IRS closes its OVDP (Offshore Voluntary Disclosure Program) on 28th September 2018. Since 2009 it has brought in $11.1 billion and disclosures from more than 56,000 taxpayers. These disclosures included the names of Financial Institutions and the names of employees who allegedly failed to prevent the facilitation of tax evasion via offshore accounts. (Now a Criminal Offence.)

This means that the US IRS knows precisely who has been doing what, where, how and when.

The US IRS is known to want to see visible FATCA enforcement and is known to be disappointed by the lack of enforcement thus far. 

Tax Authorities are known to be under pressure to hit prosecution targets, particularly concerning the failure to prevent the facilitation of tax evasion.

So now all the US IRS has to do is close the OVDP on 28th September and, in due course, pass on what it knows to Host Country Tax Authorities.

Naturally, Host Country Tax Authorities will realise that the same institutions that allegedly failed to prevent the facilitation of tax evasion pertaining to US citizens will in all likelihood have the same proclivity when it comes to non-US citizens.

Armed with this information and with new Criminal Offences that make it considerably easier to secure a conviction, Host Country Tax Authorities will find it difficult to miss any target. To coin a phrase: it will be like ‘shooting fish in a barrel’.

Many a surprised individual will be helping the authorities with their enquiries concerning what is now a criminal offence.

Will 2018Q4 see you ‘helping the authorities with their enquiries’?

 Author Haydon Perryman may be contacted here via his website 

[1] Use of American spelling due to the programme being managed in the USA.

[2] Use of British spelling due to this paper being written in the UK.

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