The Obama Administration has labored to convince the public that it takes financial crimes seriously, despite copious evidence to the contrary. The latest effort comes in a leak to the New York Times, intimating that the Justice Department will pursue criminal charges against two large banks for misconduct, the first such charges since the financial crisis. (It’s worth noting that the promised charges refer to two foreign banks, do not envision charges against individual executives, and involve incidents of fraud against the government, rather than homeowners or shareholders). One of those two banks is Credit Suisse, accused of facilitating tax evasion for wealthy Americans through private bank accounts.
But just as the Justice Department wants us to believe it will take action against banks that harbor tax cheats, the IRS has robbed it of a critical enforcement tool by delaying enforcement of a signature anti-tax evasion law for two years. This amounts to little more than a whopping in-kind donation, both to wealthy tax dodgers, who get to keep their money away from the government’s prying eyes, and to financial institutions, which get another two years to look the other way at non-compliance with U.S. law. The decision, which comes after years of lobbying from the financial industry, makes a mockery of the alleged newfound toughness from the executive branch.
The law in question is called the Foreign Accounts Tax Compliance Act (FATCA), and it actually passed Congress in 2010, tucked into a separate jobs bill. Under the law, foreign banks are required to deliver information to the IRS about any accounts held by U.S. taxpayers, or even the accounts of corporate entities where taxpayers hold a “substantial ownership interest.” To force compliance, the law requires domestic financial institutions to withhold payments to those foreign banks unless they turn over the account records.
It is a sad commentary on the ways of Washington that a law passed four years ago wasn’t scheduled to go into effect until this July, but the Treasury Department and the IRS very deliberately put together final regulations, all the while signing agreements with 22 countries who have their own bank secrecy laws, like Switzerland, enabling banks in those countries to participate in the program. Treasury released the final rules package in February.
Foreign banks, which obviously want to retain the cash cow of wealthy tax evaders, have complained about the “heavy administrative burden” of reporting to the IRS. The Securities Industry and Financial Markets Association, a lobby group, conducted a survey alleging that initial preparations for FATCA compliance cost its members $1 billion in 2013 and 2014. It’s not clear where that number was pulled from, but in fairness, it does sound big.
This is a typical tactic for the financial industry, which claims to hate paperwork so much you’d think it was led by comic strip character Cathy. (AUUGGHH!) But the paperwork gambit is a dodge the industry habitually trots out to unburden itself of regulations that could cut into profits.
The industry appears to have gotten its way. Late on Friday, in a classic news dump, the IRS issued the innocuous-sounding Notice 2014-33, announcing that 2014 and 2015 “will be regarded as a transition period … with respect to the implementation of FATCA.” The IRS takes pains to say that FATCA has not been postponed, just that it will not enforce the law against any foreign banks making “good-faith efforts” to comply. It’s unclear what “good-faith efforts” (or, later in the notice, “reasonable efforts”) means in this context, but it appears to be entirely at the discretion of the IRS.
The IRS further notes that some parts of FATCA will move forward, but the most critical measure, the forced withholding of payments to compel compliance, falls under the “period of transition.” So foreign banks making the ambiguous “good faith effort” will see no government penalties or payment cuts for two years.
This essentially allows the tax haven status quo to continue until 2016, and gives U.S. citizens the ability to funnel money into private offshore bank accounts without fear of being exposed. “While the IRS delays, more and more people will likely seize the opportunity to hide money offshore,” said Nick Jacobs, Communications Director for the Financial Accountability and Corporate Transparency (FACT) Coalition, which includes labor, faith, progressive and small business groups. This is even more assured, because Notice 2014-33 also announces a relaxation of requirements for new accounts opened through the end of the year.
Not only does this delay come as the Justice Department finally rouses itself to pursue charges against Swiss banks for aiding tax evasion, it comes in the wake of a Senate Permanent Subcommittee on Investigations report calling out Credit Suisse for its activities and the Justice Department for foot-dragging. Now just as DoJ gets the message, the IRS robs it of a critical enforcement tool. “As the Senate so superbly demonstrated just a couple of weeks ago, the need for active and vigilant enforcement against those who are hiding assets offshore is as important as ever,” said Jacobs.
For what it's worth, the Senate report argued that FATCA includes a series of loopholes that could undermine its effectiveness. For example, foreign banks must only disclose accounts of $50,000 or higher, meaning the same U.S. tax evader could conceivably take out dozens of accounts under that limit to remain hidden. In addition, account holders may be able to use shell corporations to evade scrutiny. Senator Carl Levin, the author of the report, argued that aggressive enforcement, with agencies using all legal weapons at their disposal, is the only way to stop offshore tax evasion. Yet just two months after the release of that report, the IRS goes in the opposite direction, relaxing enforcement of FATCA for two years.
This latest delay reflects the series of failures, despite consistent congressional attention, to actually rein in offshore tax havens. The Justice Department has charged 35 bankers criminally for their role in aiding tax evasion, but has not extradited one from his home country. Out of 14 banks under active investigation, only one, Wegelin, has been indicted, probably because it was going out of business anyway.
It’s easy to see the Treasury Department’s hand in this. Assistant Treasury Secretary for International Tax Affairs Robert B. Stack said in a statement that the move was “based in part on feedback from stakeholders,” code for financial industry lobbying. Treasury simply listened to the industry’s outlandish claims about disruption of the financial system or overwhelming costs. They heeded the concerns of the banks over the concerns of widespread tax evasion, depriving the government of money that could be channeled to productive activities. In its initial story, the Wall Street Journal cited a senior Treasury Department official remarking that the new notice would be met with “a sigh of relief.” I would imagine so.
As has been sadly typical under the Obama Administration, every step forward on accountability, particularly for financial crimes, gets accompanied by a cascade of steps back.