For many years, the United States has required U.S. taxpayers to report foreign financial holdings. Although the Bank Secrecy Act dates back over 4 decades, compliance has been spotty. In recent years, the IRS and Justice Department have really ramped up enforcement efforts. Congress and the Obama administration passed FATCA, the Foreign Account Tax Compliance Act, as a method of bolstering offshore reporting compliance (and generating new revenue too).
FATCA and similar proposed global measures are great for ensuring that individual taxpayers report their personal accounts but are not very effective for accounts owned by corporations, trusts, LLCs and accounts held in nominee name. A nominee account is one whose beneficial owner is different from the name on the account.
Nominee ownership has long been a problem for the IRS and tax authorities worldwide.
Last week, the European Parliament held a preliminary vote to set up “public registers” to identify corporate owners. Transparency advocates have hailed the measure but we wonder how effective it will really be. The World Bank says that 70% of tax evasion takes place through nominee accounts. These accounts are also used by criminal money launderers and terrorist groups.
Assuming that 70% figure from the World Bank is accurate (we believe it is), the IFC Review says that regulators and law enforcement only catch 1% of those funds funneled through nominee structures.
The European Parliament wants all governments to list the ultimate or beneficial owners of companies and trusts in a publicly available online business register. Initial reactions appear favorable from most countries with the exception of Germany.
Like FATCA, the devil is often in the details. Although the concept of corporate transparency is a good one, we believe it will be difficult to get banks, lawyers, trust officers and fiduciaries to work together and collect beneficial ownership information. Unfortunately, assuming that all the stakeholders can come together on a reporting framework, the problem will always be with the people owning nominee accounts. The honest ones will cooperate but the real crooks will never identify the true, behind-the-scenes owners of their corporations and entities.
Catching them will remain a real challenge for law enforcement.
“They need to verify the identity and sometimes that means piercing various layers,” says Nienke Palstra, a policy expert on anti-money laundering at Transparency International, as quoted by IFC Review. Unfortunately, the true tax evaders and money launderers often use multiple layers of nominee corporations to better obfuscate their identity.
The European Union proposal requires corporations to report changes in ownership within 30 days. Beneficial owners and their agents who fail to cooperate or false information could face criminal sanctions. That proposal should provide some teeth to the law.
Although many Americans think of the Cayman Islands or Monaco as secrecy jurisdictions, the United States does not require public disclosure of beneficial ownership. Entities such as trusts and LLCs are required to file certain tax returns, but the public rarely can determine who owns these businesses.
FATCA is an important second step in the IRS attempts to identify all Americans with interests in a foreign account. While many question the wisdom of its methods, we do not believe that FATCA is the last word on combatting offshore tax evasion. We expect to see more efforts at bank and tax transparency. The EU’s move to increased corporate disclosures is one such method.
Do you have unreported accounts in a nominee name? If the answer is yes, speak with an experienced FBAR attorney immediately. The IRS considers an unreported account that disguises the name of the try owner to be an affirmative act of tax evasion. There are plenty of options and amnesty programs to help you come into compliance but time is running out. With FATCA just months away, the IRS will soon be receiving the names of tens of thousands of Americans with unreported accounts.
The IRS tax attorneys at Mahany & Ertl can provide a confidential, no obligation consultations to help answer your questions and explain your responsibilities. Thereafter, most services can be provided on a reasonable flat fee. We also help foreign financial institutions comply with FATCA.
For a free consultation, contact one of our experienced FBAR lawyers today; attorney Bethany Canfield at or by phone at (414) 223-0464. The author, Brian Mahany, can also be contacted at or (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and will be answered within 1 business day. (We also have hundreds of text searchable posts on our Due Diligence blog.)
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