U.S. Treasury suspends FATCA talks with Russia

(This ACFCS.org story is adapted from an article in the August 2014 International Enforcement Law Reporter, published and edited by attorney Bruce Zagaris. A partner at Berliner, Corcoran & Rowe, in Washington, DC, Mr. Zagaris is member of the ACFCS Advisory Board and a leading world expert on international financial crime matters.)

By Bruce Zagaris, Contributor to ACFCS

As a result of the Russian annexation of Crimea, the U.S. Department of the Treasury has ceased negotiating a Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreement (IGA) with Russia, leaving the Russian Finance Ministry scrambling to find other ways to allow local banks to comply with FATCA before it takes effect on July 1.

On April 29, 2014, Senators Carl Levin, D-Mich. and John McCain, R-Ariz, urged the Obama administration to continue to refrain from further negotiations with Russia on compliance with FATCA until Russia ceased what the Senators characterized as aggressive and destabilizing actions toward Ukraine.

Levin is chairman of the Senate Armed Services Committee and of the Permanent Subcommittee on Investigations, which has extensively explored the use of offshore banks in avoiding U.S. tax compliance. McCain is ranking member of the Permanent Subcommittee on Investigations and a member of the Armed Services and Foreign Relations committees.

On May 9, 2014, Treasury Acting Deputy International Tax Counsel Ginny Chung, speaking at the spring meeting of the American Bar Association Section of Taxation, said that Russian banks may be able to participate directly, indicating that this might take place on a case-by-case basis.

 Russian FATCA implementation initiatives

The Russian Finance Ministry has recently proposed legislation that would enable Russian institutions to comply with FATCA. Media reports suggest the proposed legislation would not authorize Russian banks the right to impose FATCA’s 30 percent tax on certain cash transfers. It would allow them to exchange information about their U.S. account holders not only to the IRS, but to other companies with the authority to withhold taxes.

The Russian Finance Ministry amended proposal also allows banks to refuse recalcitrant clients (e.g., those who do not provide the information required under FATCA or who do not authorize the banks to withhold foreign taxes).

The Russian proposed legislation also provides reciprocity. Foreign banks with majority ownership in Russian banks must share information with Russian authorities about their Russian taxpayers if more than $10,000 has passed through the client’s account during the financial year.

On April 23, 2014, amended legislation sent to the Russian Parliament would permit not only banks, but financial institutions, including brokers, depositories, insurers, investment funds, and pension funds to obtain and exchange information with the IRS, and refuse to service recalcitrant clients.

The deadline for foreign financial institutions to register in order to be on the initial IRS list and obtain a Global Intermediary Identification Number (GIIN) by July 1, 2014 is May 5, 2014. U.S. and other financial institutions worldwide will be able to access the initial list, which the IRS will update monthly. Foreign financial institutions not on the list may experience delays in receiving payments.

In an official review published May 14, the government approved legislation that would let Russian banks independently share information with foreign tax authorities.

 U.S. Senators urge Treasury not to resume IGA negotiations

In a letter sent by Levin and McCain, the Senators argue that the Treasury should not negotiate with the Russians to help them avoid FATCA’s sanctions at a time when Russian forces are threatening areas of the Ukraine. The letter explains that declining to negotiate a FATCA IGA would impose financial pressure upon Russia and help reinforce diplomatic efforts to avoid military action.

According to the letter, if the Treasury does choose to negotiate, it should at least ensure that negotiations do not benefit those Russian financial institutions that have Russian government funds, or have Russian government officials on their boards or in their leadership, or otherwise help support disruptive activities in the Crimea or Ukraine.

FATCA as sanctions mechanism may distort purpose

While certain parts of the executive and legislative branches may want to impose pressure on Russian financial institutions, the withholding tax in FATCA was only meant for one purpose: to motivate foreign financial institutions to comply with FATCA. The decision to negotiate FATCA IGAs was in response to the difficulties of foreign governments complying with FATCA’s requirements to obtain and transfer to the IRS bank account information protected by financial privacy and often constitutional laws. FATCA did not contemplate interaction with economic sanctions. In fact, the legislative history of FATCA only views withholding as a last resort and was meant to provide incentives for foreign financial institutions and governments to comply with FATCA.

The effort to use FATCA as a sanctions mechanism can potentially distort its purpose to give incentives to comply with FATCA. Already controversial and enormously complex and burdensome in terms of compliance, the use of FATCA as a sanctions weapon is a paradigm shift. The best argument whereby the U.S. Treasury can stop negotiating a FATCA IGA would be lack of confidence with the Russian exchange of information system. Indeed, the enactment by the U.S. Congress of the Magnitsky legislation was in response to allegations of Russian abuse of tax charges to detain, arrest, and convict Magnitsky and others of tax violations.

William F. Browder, the co-founder of the company Hermitage, helped to expose the alleged misuse of tax charges against the Hermitage in order to confiscate his shares in Hermitage after he become critical of Russian corporate governance laws. Over the years of its operation, Hermitage had occasionally furnished to the press information related to corporate and governmental misconduct and corruption within state-owned Russian enterprises.10

On December 14, 2012, the Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012 (H.R. 6156), which was signed into law by President Obama.11 On July 11, 2013, a court in Moscow found Magnitsky guilty of tax evasion in a posthumous trial. The court also found Magnitsky’s onetime client, the U.S.-born British investor William Browder, guilty of evading some $17 million in taxes.12 Notwithstanding the apparent problems with the integrity of the Russian tax enforcement system, the U.S. Treasury has not yet mentioned this problem and indeed had been negotiating the FATCA IGA until the Crimea issue arose.

It will be important to see the response from G-20, the European Union, and the G-7. On February 13, 2014, the OECD issued a Common Reporting Standard to globalize automatic exchange of information. The G20 has pledged to engage in automatic exchange of information by the end of 2015. Since automatic exchange of information is costly and bureaucratic for all countries, the imposition of another obstacle (e.g., refusing to conclude IGAs) may be a dangerous step.

International tax enforcement is interacting with economic sanctions and illustrates the interplay between international law, policy, and diplomacy.

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Bruce Zagaris | Berliner, Corcoran and Rowe, Washington, D.C. | Partner
A distinguished expert on international financial crime with decades of experience in criminal trials and consultancy work for the public and private sector, he is a partner at the firm of Berliner, Corcoran & Rowe and the editor of International Enforcement Law Reporter, a respected monthly publication. He has worked as a consultant and counsel for fourteen governments and the United Nations on tax enforcement and international criminal law issues. His private practice includes counseling corporations and individuals on extradition and international evidence gathering cases, and counseling witnesses for grand jury investigations, and he has testified before Congress on multiple occasions. He was the chair of the Committee on International Criminal Law, American Bar Association, and is co-chair of the Committee on Public International and Criminal Law, International Law Section, DC Bar Association, and has been an adjunct professor at Fordham University Law School, American University, and the Washington College of Law. A prolific writer, he has authored and edited several books and hundreds of articles on international law