After a yearlong investigation, the US Senate Finance Committee probed into a FATCA Loophole and delivered an investigative report titled “The Shell Bank Loophole” that exposes a tax evasion scheme under a FATCA loophole that allows banks offshore to accept funds from U.S. persons without reporting them to the IRS. Senate Finance Committee Chair Ron Wyden, D-Oregon stated that: “The Finance Committee has uncovered a glaring loophole in one of our most important tools in the fight against offshore tax evasion,” said Wyden. “With little effort, wealthy tax cheats like Robert Brockman are able to convert shell companies into shell banks, and self-certify they are reporting income held in offshore accounts to the IRS. Foreign banks in Switzerland and the Cayman Islands are then exempt from complying with basic FATCA requirements to identify and report U.S. accounts. There are hundreds of thousands of shell companies in offshore tax havens that have been turned into IRS approved banks with virtually no scrutiny by the IRS.”

At the forefront of the report is the IRS Global Intermediary Identification Number (GIIN) and how simple it is to obtain it. The big questions going forward are what will the IRS do with the issuance process of the GIINs? Is getting a GIIN too simple and leads to tax evasion? Will IRS enforcement increase? The investigative report sheds light on the proposed Government direction including stricter due diligence requirements for foreign banks, enhanced scrutiny of offshore entities registering with the IRS as financial institutions and a sharp increase in IRS enforcement resources to conduct complex audits involving high-net worth accounts and partnerships.

Brockman

The report states that: “Robert Brockman concealed approximately $2.7 billion in income from the IRS and evaded hundreds of millions in federal taxes. The Justice Department indicted Brockman on 39 counts, including tax evasion, failure to file foreign bank account reports, money laundering and other offenses. As part of the alleged scheme, Brockman used a complex structure involving offshore foreign trusts, foreign and domestic shell companies, nominees, and foreign bank accounts to conceal his assets. The allegations against Brockman represent the largest tax evasion case brought against an individual in U.S. history.”

The GIIN

The IRS utilizes the FATCA Foreign Financial Institution Registration System. The FATCA Registration System is a secure, web-based system that Financial Institutions (FIs), Foreign Financial Institutions (FFI), financial institution branches, direct reporting non-financial foreign entities (NFFE), sponsoring entities, sponsored entities, and sponsored subsidiary branches can use to register under FATCA. The FATCA Registration System establishes an “online account” for the FIs to register with the IRS under what is known as the “FATCA Portal,” renew their agreement, and complete and submit FATCA certifications. The FIs and their branches are issued Global Intermediary Identification Numbers (GIINs). The GIIN is used by the FIs to identify themselves to withholding agents and tax administrators for FATCA reporting purposes. A registered and compliant Financial Institution that has been issued a global intermediary identification number (GIIN) will appear on a monthly published IRS FFI list.

Who is able to register under the FATCA Registration System and obtain a GIIN?

• An FFI, or foreign branch of an FFI or a U.S. financial institution (USFI), treated as a reporting FI under a Model 1 IGA.
• An FFI, or foreign branch of an FFI or a foreign branch of a USFI that intends to apply for status as a QI, treated as a reporting FI under a Model 2 IGA.
• An FFI, or branch of an FFI, other than one covered by an IGA (other than when registration is required under the applicable IGA).
• An entity seeking to act as a sponsoring entity agrees to perform the due diligence, reporting, and withholding responsibilities on behalf of one or more sponsored entities.
• A USFI seeking to act as a lead FI for purposes of registering its member FIs.
• A direct reporting NFFE Agrees to perform the due diligence and reporting obligations required of its status as a direct reporting NFFE.
• A trustee of a trustee documented trust.

The US Senate Finance Committee summarizes the FATCA Loophole as follows:

1. Establish a shell company in a FATCA partner jurisdiction, even those in well-known tax haven jurisdictions like Bermuda or the British Virgin Islands.
2. Submit IRS Form 8957 (Foreign Account Tax Compliance Act (FATCA) Registration) to register the shell company as a foreign financial institution and obtain a Global Intermediary Identification Number (GIIN).
3. Open an account at a bank in Switzerland, or other FATCA partner jurisdiction, in the name of the shell company now registered as a financial institution. Use an attorney or other intermediary as the signatory of the account.
4. Invest in private equity firms or other investment vehicles and direct the fund manager to wire proceeds from investment activities in the United States to the shell company’s account in Switzerland or elsewhere.

The US Senate Finance Committee summarizes the FATCA Loophole Results as follows:

• The Swiss bank is no longer required to report that the account is held by U.S. persons because the account is held in the name of an entity with a valid GIIN number. The Swiss bank is also no longer required to conduct due diligence to determine whether the account has a U.S. nexus.
• The shell company is now operating as a “shell bank” and can self-certify reporting offshore accounts to IRS for FATCA purposes.
• In the absence of an audit or other federal investigation, is it highly unlikely the IRS will detect whether these accounts are concealing, or underreporting assets held by U.S. persons.

What the US Senate Finance Committee will recommend to the IRS and Congress to address the FATCA Loophole:

• Impose additional due-diligence requirements on transfers between foreign financial institutions (FFIs) in situations involving large transfers of funds into relatively-small, closely held FFIs that pose an increased risk of tax evasion.
• Require more rigorous screening of applications for GIIN numbers in situations where there is increased risk of tax evasion, potentially including GIIN number issuances to entities in jurisdictions widely considered tax havens, or entities that appear to be relatively closely-held. Of note, under the Corporate Transparency Act there is disclosure requirement by entities with fewer than 20 employees in the United States or that lack a physical operating presence in the United States.
• Strengthen the IRS Whistleblower Office and better utilize incentives available for whistleblowers to come forward with information to detect offshore tax evasion.
• Increase IRS enforcement resources to ensure it has the manpower and infrastructure sufficient to audit complex financial structures involving high-net worth individuals, including undeclared offshore accounts.
• Increase audits of large partnerships.
• Increase disclosure of high-value financial accounts domestically.
• Increase information sharing and coordination between partner jurisdictions and more closely align reporting regimes with the Organization for Economic Cooperation and Development’s (OECD) Consistent Reporting Standards.

Expect regulatory changes

All FIs ought to make sure that they have adequate BSA/AML and Enhanced Due diligence processes in place. In addition, knowing who the ultimate beneficiary is will help protect an FI’s legal, operational and reputational risk.

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