You have implemented FATCA; what comes next? Will your company be the next witness in a US tax investigation? Financial institutions around the world must now prepare to respond to anticipated inquiries and investigations as the US follows leads it has obtained through the offshore account disclosure programs, FATCA and similar developing transparency initiatives.

In July 2014, Latham & Watkins partners Miriam Fisher and Brian McManus along with associate Chad Nardiello spoke at the Global Tax Enforcement Conference held in Douglas, Isle of Man. The panel discussions explored the evolving international tax enforcement landscape in which transparency, disclosure and automatic information exchange feature as never before. The program covered the implementation of the Foreign Account Tax Compliance Act (FATCA) and the development of similar multilateral financial reporting standards, the scope and impact of recent offshore banking disclosure programs, the United States’ increasingly aggressive information-gathering and investigatory techniques and the expanding range of sanctions.

Enormous attention has been focused on the role of Swiss banking in facilitating tax avoidance, with a number of banks still under investigation and dozens more making disclosure to the US in exchange for non-prosecution agreements. “For foreign financial institutions not caught in the glare of Swiss banking scrutiny, much of the focus to date has been on how to implement FACTA — in terms of the nuts and bolts of instituting the necessary due diligence and reporting mechanisms,” said McManus. “But from our perspective, the real issue is, what comes next? What will the US government do with all the information it obtains and how will it impact multinational financial services businesses and financial institutions?”

“The effectiveness of the new transparency and disclosure regimes, such as FACTA, will be fully tested only when US tax authorities mine and investigate the data obtained in the interests of tax enforcement; this they are capable of and fully intend to do,” Fisher added. “Thus, financial institutions around the world can expect increased and regular interaction with US tax authorities in the near future.”

In this interview, Fisher and McManus explain why US and non-US banks and financial service providers should prepare to deal with US investigatory actions anticipated in the wake of the upcoming Swiss bank and FATCA disclosure deadlines. 

What kind of data will the US government obtain and what will they do with it?

Fisher: Over the past several years, the US government has obtained a treasure-trove of information about US persons and businesses with undisclosed foreign assets. In many cases, the information also implicates both US and foreign financial service providers and banks in efforts to conceal these assets. The US has obtained volumes of information directly from financial institutions through the use of “John Doe Summonses.” It has also received information from more than 45,000 US persons who have participated in the Internal Revenue Service (IRS) Offshore Voluntary Disclosure Program, including very specific information about the identity and conduct of foreign bankers, lawyers, advisers and other so-called facilitators. The US has also obtained additional information from its whistleblower program (whistleblowers are paid a percentage of the tax collected) as well as from cooperation agreements arising from criminal investigations, undercover operations and various other sources. 

Currently, more than 100 Swiss banks are participating in the Swiss Bank Amnesty Program announce by the US Department of Justice (DOJ), whereby participating Swiss banks are required to disclose substantial data about accounts they have held for US account holders, including information about other financial institutions that transferred funds to or received funds from the suspect accounts. Swiss law generally prevents the banks from disclosing the names of the US account holders, but the information leads will precipitate prompt investigatory action by the DOJ and IRS. In addition, under FATCA, foreign financial institutions will be required in early 2015 to provide detailed information to the IRS about their US account holders, either directly or via their local governments. The IRS has the capability, resources and intention to mine this data for indicators of tax avoidance. 

The IRS and DOJ are currently building cases against foreign financial institutions, their employees, investment advisers, lawyers and the account holders themselves. To date, there have been more than 100 convictions of US persons with undisclosed foreign accounts, foreign bankers and facilitators, as well as indictments of non-US banks.  The Swiss Bank Amnesty Program and upcoming FATCA disclosures will cause the IRS and DOJ to re-double their investigatory activity vis-à-vis domestic and foreign banks and financial service providers that have handled the funds of US depositors. It is critical that financial institutions are prepared to handle these inquiries and respond appropriately.

What do banks and financial service providers need to do to prepare for a global tax investigation?

McManus: While in the process of gathering data for current FATCA compliance purposes, foreign financial institutions also need to be evaluating potential exposure arising from prior conduct and anticipating US inquiries on the horizon. In a foreign jurisdiction where banks may have assisted US taxpayers to evade taxes in the past, it is safe to assume the IRS or DOJ has obtained or will soon obtain information concerning US account holders’ interactions with your institution and will follow up with appropriate inquiries, using a variety of information-gathering techniques. US branches of foreign banks and US-based banks also need to be sensitive to transfer activity to or from banks that may have been complicit in facilitating US tax evasion. 

Financial institutions should be thinking about the following: 

  • Is your business prepared for US governmental inquiries?
  • Are your due diligence and compliance procedures adequate?
  • Are potentially culpable employees still employed at your company?
  • Is your current staff adequately trained?
  • Are you sensitive to potential whistleblowers?
  • Are you exercising care and adequate diligence as new US-related clients approach your company?
  • Are you susceptible to parallel inquiries from your local tax authority or those of other countries?
  • Do you know what to do when a treaty request arrives or an IRS criminal investigator appears at your door?

If a financial institution or financial service provider has identified its own potential non-compliance, it needs to take steps to address and end the non-compliance. Being proactive is the best course. Dealing with any US investigatory inquiries will also require an understanding of the interplay of US and local law and procedure, as well as applicable treaties. International tax enforcement expertise will also be necessary as other countries increasingly ratchet up their tax enforcement efforts.

Why is Latham uniquely positioned to help clients with FATCA follow-up and other US government inquiries?

Fisher:  Latham’s client base includes representation of financial institutions worldwide. Our lawyers also have been deeply involved in representing clients caught up in the IRS and DOJ disclosure initiatives and understand the policy and practical implications of the constantly evolving programs aimed at global tax enforcement. We are experienced in handling US tax inquiries, including specifically cross-border information-gathering by US tax authorities in both the civil and criminal investigative context. With offices throughout the US and around the world, Latham can field a team to evaluate and handle multi-jurisdictional tax inquiries.