Cheat Street: How U.S. Banks Help Foreigners Dodge Their Taxes

Last Updated May 18, 2011 6:18 PM EDT

One guess as to what is the most popular nation on earth for dodging taxes. Switzerland? Luxembourg? Bermuda? Nope. It's the good 'ol US of A, reports Michael Hudson of the Center for Public Integrity:
"We're the biggest tax haven in the world," says Robert Goulder, editor-in-chief of U.S.-based Tax Notes International. "People joke about the Cayman Islands. The biggest haven is an island, all right. It's either Manhattan or Great Britain."
Foreigners have an estimated $3.6 trillion on deposit with American financial firms, according to the Commerce Department. A large portion of those funds don't get disclosed in their home countries. As Hudson explains, non-U.S. citizens living outside the country who have money stashed in the U.S. are exempt from paying taxes, and even from reporting the deposits and interest. The lone exception is Canada, which exchanges banking information with the U.S.

Feds target American tax cheats
By contrast, the U.S. is cracking down on Americans who use offshore accounts to avoid taxes. Swiss banking giant UBS in 2009 paid a $780 million fine to settle criminal charges that it helped U.S. citizens evade taxes. The Justice Department has since expanded its investigation into such practices to other firms that offer such "private banking" services, including another major Swiss bank, Credit Suisse (CS). U.S. tax authorities are also seeking legal permission to force HSBC (HBC) to identify thousands of Indian-American customers who are suspected of dodging U.S. taxes by keeping funds in the British bank's branches in India.

Under the IRS's so-called Foreign Bank and Financial Accounts rule, U.S. taxpayers with overseas bank accounts must annually file a form disclosing their foreign assets. Failure to report the funds can result in a huge fine -- up to 50 percent of the account balance for each year the accountholder violates the rule.

For American banks, however, helping foreigners cheat on their taxes is big business:

Jack Blum, a former U.S. Senate investigator and an authority on offshore tax shelters, says U.S. bankers "sell tax evasion to citizens of Central America, the Caribbean, all over Latin America." The U.S. government hasn't put a stop to it, Blum says, because bankers and politicians don't want to stop the flow of foreign cash into the United States.
The Florida connection
That's why bankers and politicians are trying to quash a proposed IRS rule under which U.S. banks would have to report interest paid to foreign nationals. Hudson told me that representatives from the American Bankers Association, Florida Bankers Association and Florida International Bankers Association spoke out against the plan at a meeting today at IRS headquarters in Washington to discuss the rule. All 25 members of Florida's U.S. House delegation -- Republicans and Democrats alike, he notes -- also recently sent a letter to President Obama urging him to quash the proposal.

Why Florida? Because financial institutions operating in the state serve numerous customers in Latin America.

Bankers make two basic arguments against requiring foreigners to disclose information on their U.S. accounts. First, they claim it would drive overseas depositors to withdraw funds from American banks, making the companies less competitive and siphoning hundreds of billions of dollars in capital from the U.S. economy. Second, identifying wealthy clients with funds in the U.S. could make them targets for kidnappers or terrorists in their home countries.

The Florida lawmakers told the White House in arguing against the IRS plan:

This proposal may be good news for high-tax governments, but it is contrary to American economic interest. The jobs of American workers and the competitiveness of U.S. companies should be our top priorities.
How loose U.S. tax rules hurt other countries
Other experts and lawmakers don't buy it. Sen. Carl Levin, D-Mich., said in a letter last month to the IRS that there is "virtually no evidence" that the new disclosure requirement would scare off foreign nationals from depositing money in the U.S.

The IRS also points to the growing international cooperation to increase financial transparency and reduce bank secrecy. After all, if the U.S. is going to block foreign banks from helping Americans dodge taxes, then it must reciprocate by cooperating with other countries seeking to curb such behavior by their own citizens.

Meanwhile, allowing American banks to help non-U.S. citizens avoid taxes drains money from other countries. That's a particular hardship in revenue-starved places like Mexico, fostering corruption. "All of this attention is paid to money going in the other direction outside the U.S.," Hudson told me, "but you don't hear much about the other side of it, where the U.S. is the tax haven."

Thumbnail from Flickr user _J_D_R_
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