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May 31, 2016


Addled by offshore enormity? a Q & A on foreign-account compliance in the wake of the Panama Papers

For over seven years, U.S. authorities have been cracking down aggressively on unreported offshore accounts. The crackdown has proceeded on multiple levels, across continents, with surprisingly effective results.

A key moment came in 2009, when the Swiss banking giant UBS agreed to pay $780 million to resolve allegations by the U.S. Justice Department of facilitating tax evasion by U.S. taxpayers through offshore accounts. With this huge crack, the formerly impregnable wall of Swiss bank secrecy began to crumble.

The U.S. raised the ante even further when Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010. The Treasury Department followed up with scores of intergovernmental agreements with countries around the world to impose obligations on financial institutions to report offshore accounts held by U.S. taxpayers or face stiff penalties.

And now comes another offshore tax tidal wave: the Panama Papers. In this post, we will attempt to place the Panama Papers story in the context of the ongoing enforcement crackdown by the U.S. on offshore accounts.

What are the Panama Papers?

The Panama Papers are a gargantuan cache of data from the files of a Panamanian law firm that specialized in offshore tax issues. An anonymous source leaked the data to a journalist at the Munich-based newspaper Suddeutsche Zeitung.

The German journalists reached out the International Consortium of Investigative Journalists (ICIJ) to make sense of the massive trove of data. The ICIJ in turn shared the documents with journalists around the world. Coordinating their efforts, several hundred journalists in 76 countries published articles about how extremely wealthy people use secretive strategies such as shell companies to hide wealth, launder money and evade taxes.

What effect did the publication have?

The effects were immediate and far-reaching.

For example, the prime minister of Iceland resigned, after his offshore company was named. So did a government official in Armenia. Numerous countries began investigations into offshore wrongdoing. And Russia’s president, Vladimir Putin, claimed the disclosures were an American plot to paint his regime as corrupt.

Publication of the Panama Papers has also increased calls around the world for more transparency in international finance.

Will there be any changes in the U.S.?

The Obama administration put in place a new rule to require financial institutions to verify the identities of the owners of so-called shell companies. The rule had been proposed back in 2014 by FinCEN – the Financial Crimes Enforcement Network. The Panama Papers release, however, was the catalyst for putting it into action.

The financial-services industry has expressed concern about such a rule because Delaware and some other states currently lack requirements for reporting the names of the owners in order to register a company.

The Obama administration also proposed legislation to strengthen laws against money laundering and tax evasion. This includes addressing the issue of allowing companies to reincorporate overseas with a lower tax rate (tax inversion).

Isn’t the U.S. already doing a lot to crack down on offshore tax evasion?

Yes, that is why begin this post with a reference to the UBS case and FATCA.

How many taxpayers have participated in limited amnesty program such as the Offshore Voluntary Disclosure Program?

The number exceeds 54,000. The U.S. has also collected more than $8 billion from the crackdown. This includes tax, interest and penalties.

It is therefore critical to get skilled legal counsel when facing offshore account compliance issues.

Offshore Accounts/International Tax Disputes