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Sanctions Enforcement – Violations and De-Risking

9 years ago

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by Ambassador Curtis A. Ward

Sanctions Enforcement – Violations and De-risking

Ambassador Curtis Ward

(08 Nov. 2016) — Discussions at various levels throughout the Caribbean region on the threat of de-risking by U.S. and European banks have focused primarily on the debilitating possible effects on Caribbean financial institutions and Caribbean countries’ economic development. Without access to U.S. and European banks for correspondent banking relationships and lack of future access for payable through accounts and other financial transactions would definitely create a crisis in the Caribbean and should be treated with unquestionable urgency. The discussions are quite rightly focused on these issues. However, there are other factors considered in the decision-making process of U.S. and European financial institutions in taking de-risking measures.

The issue of de-risking and the effects on the Caribbean region and developing countries in general are being discussed at the regional and global levels, including in CARICOM, the IMF/World Bank and in the United Nations. The general consensus is that the issue must be dealt with in such a way as to provide developing countries with the space to participate in the global financial system. However, such space will not be automatic for Caribbean financial institutions unless they implement and adhere to internationally acceptable standards to prevent money launderers and terrorists from gaining access to their institutions.

Like every international or global issue affecting the Caribbean region, it is incumbent on governments and financial institutions in the region to take the time to understand fully the issues surrounding the decisions by U.S. financial institutions and elsewhere, in order to deal with them effectively and appropriately. The time to be proactive to this threat has long passed and the Caribbean region has found itself being reactive and in a crisis mode – playing catch-up. Understanding the rationale for de-risking is important to the process of finding solutions.

Sanctions enforcement is a primary risk factor for U.S. and financial institutions. Banks and other private sector entities have been subjected to heavy criminal and civil penalties, in particular by the U.S. Justice Department (DoJ) and judicial system for criminal violations and fines, and by the U.S. Treasury Department for civil violations and fines for sanctions violations. Criminal penalties and civil fines are imposed on financial institutions for violating sanctions and embargos imposed on individuals, entities, and countries by the U.S. government (USG). The primary aim of these penalties and fines are to deter financial institutions and private sector entities from engaging in and hiding transactions with sanctioned governments, individuals and groups.

As stated by the presiding judge, U.S. District Court Judge Lorna G. Schofield, in the BNP Paribas, S.A. (BNPP) sanctions violations case, BNPP “not only flouted U.S. foreign policy but also provided support to governments that threaten both our regional and national security and in the case of Sudan, a government that has committed flagrant human rights abuses and has known links to terrorism.” The Judge also stated that the forfeiture of over $8 billion will “surely have a deterrent effect on others that may be tempted to engage in similar conduct, all of whom should be aware that no financial institution is immune from the rule of law.”

The forfeiture order and criminal fine against BNPP in 2015 was $8,833,600,000 forfeited and $140,000,000 in fines (almost $9 billion) set a new precedence for penalties and fines imposed for sanctions violations by the USG. Consider this vis-à-vis the GDP of all CARICOM member states combined. The BNPP penalty and fine are the largest in U.S. history for sanctions violations. Prior to the BNPP forfeiture and fines, perhaps the highest forfeiture was imposed on HSBC Holdings plc and HSBC Bank USA N.A. in the amount of $1.256 billion in 2012.

While BNPP and HSBC were found to have deliberately hid transactions, using bank secrecy laws and other methods to facilitate sanctions evasion, smaller financial institutions, operating in an environment where monitoring and enforcement do not meet international standards, may inadvertently facilitate access to their financial institutions for money laundering and terrorist financing. It is also important for these financial institutions to have in place compliance officers that understand the global sanctions enforcement landscape. It is equally important for Caribbean financial institutions to have access to a one-stop source for designated individuals, groups, and entities subject to sanctions by the United Nations Security Council, the USG and the European Union.

First let me emphasize that enforcement of sanctions is critical to the enforcement of international norms, preventing international criminal networks access to the financial system, and preventing money laundering and terrorism financing (AML/CFT). Sanctions also seek to prevent human rights violations, curb conflicts, and prevent proliferation of weapons of mass destruction (WMDs), their precursors and delivery systems. De-risking by large banks is an effort to reduce their exposure to AML/CFT violations and other sanctioned activities that may escape the scrutiny and capacity of foreign banks and inadvertently facilitated through their correspondent relationships and payable through accounts.

I have no doubt Caribbean financial institutions wish to comply with international standards, and they are taking the necessary actions to meet these standards. Most are well on their way. Now they have to convince U.S. and European banks that they are not contributing to the risks discussed above. They have to demonstrate that they are monitoring appropriate sanctions lists and that their systems can identify automatically new additions to these lists – the U.N., the U.S. and European Union lists – in order to block access to those designated and listed.

CARICOM could do well to facilitate the information flow in real time from the U.N., the U.S. and European Union on listings and designated individuals and entities that are subject to sanctions, in particular assets freezes. These lists are easily accessible and are found on respective websites: U.N. Security Council (Consolidated List); U.S. Treasury Department (Special Designated Nationals and Entities list); and the U.S. State Department (Foreign Terrorist Organizations list). Establishing a CARICOM “consolidated list” which is updated each day and available in real time to all CARICOM member states would be a step in the right direction. This facility would help Caribbean countries with limited resources and technical capacity to monitor all requisite lists on a daily basis.

U.S. laws and regulations, and Executive Orders governing the U.S. financial system apply to all U.S. financial institutions. They recognize the risks they face and the high penalties to which they are subjected when violations occur. These are not imaginary penalties and fines. As stated above the DoJ actively pursues sanctions violators and the fines are extraordinarily quite severe. The Internal Revenue Service-Criminal Investigation works closely with the FBI and DoJ prosecutors to pursue banks and other financial institutions who violate sanctions. De-risking is one way of protecting their behinds or at least reducing their exposure. They really don’t care about the effect on Caribbean countries. We do.

Ambassador Curtis A. Ward, B.A., J.D., LL.M., is an attorney and international consultant, and Adjunct Professor in the Homeland Security Graduate Program at the University of the District of Columbia. As former Ambassador of Jamaica to the United Nations he served two on the U.N. Security Council. He was Expert Adviser to the UN Counter-Terrorism Committee for three years. He specializes in terrorism/counterterrorism legal and policy frameworks; anti-money laundering and countering financing of terrorism (AML/CFT); sanctions implementation; crime and security; human rights, rule of law and governance.

Taxing Caribbean Diaspora Savings and FATCA Reporting

9 years ago

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by Ambassador Curtis A. Ward

Taxing Caribbean Diaspora Savings and FATCA Reporting

Ambassador Curtis Ward

(Nov. 03, 2016) — It is common practice for members of the Caribbean Diaspora to open savings accounts in local financial institutions in their countries of origin. Such accounts are not intended as means to evade U.S. taxes and they do not violate U.S. laws. These accounts are opened for various legitimate reasons – retirement savings, building retirement homes, support of family members, and taking advantage of higher interest rates available in these countries compared to where they live and work. It is particularly true of Caribbean Diaspora members living in the United States where interest rates on saving accounts have been extraordinarily low for several years while interest rates in the Caribbean have traditionally been significantly higher.

With the certain expectation that all Caribbean governments will accede to the FATCA reporting requirements, there are concerns in diaspora circles about possible tax liabilities that may arise from reporting on these accounts to the U.S. government (USG). The question therefore arises: Are there implications of FATCA on Caribbean diaspora savings in home country financial institutions? The short answer – Yes, but with qualifications. Some of these concerns may be assuaged if affected savers are apprised of the extent of possible exposure to U.S. tax obligations attached to these foreign savings and trust accounts. There is nothing in FATCA reporting requirements to prevent members of the Diaspora from continuing to take advantage of saving in financial institutions in their countries of origin.

US Treasury Department

In considering the implications it is important to take note of some specific FATCA requirements that affect accounts held in foreign banks (outside the U.S.). As a matter of fact, with regard to the U.S., there may be very little exposure to additional tax liabilities on such foreign-held accounts, in particular if these accounts are, or were established from earnings already taxed in the United States; as long as the individual can demonstrate to the Internal Revenue Service (IRS) that these accounts were not established to evade U.S. tax liabilities, and interests income on these accounts have been reported on annual tax returns. Also, interest income already taxed in the countries where these deposits are held may be exempted under current Avoidance of Double Taxation Treaties between the United States and the host countries.

Furthermore, it will be equally important for taxpayers to be able to demonstrate that the funds deposited in these accounts were derived from legitimate sources. This is an effort to ensure that these foreign-held funds are not derived from illegitimate activities and are not money-laundered funds. As regards all legitimate source funds, a U.S. citizen or resident depositor is already obligated under U.S. law to report and pay income taxes on non-exempt interest payments.

As stated above, a U.S. depositor, at the least, will be required to provide a paper trail for the deposits made to these foreign accounts, including report of interest earnings from whatever source on their annual tax filings with the IRS. Failure to have done so in the past may result in penalties and fines by the IRS when FATCA reporting gets underway in January 2017. Also noted above, and worth repeating, while the FATCA aims to reign in U.S. tax evaders the USG has a deep interest in preventing money laundering and terrorist financing and has an interest in foreign financial institutions’ capacities and practices to identify and report suspicious transactions.

Following is a synopsis of FATCA provisions that seem most relevant to Caribbean diaspora depositors. My references are drawn from the inter-government agreement (IGA) entered into between the governments of the United States and Jamaica for the implementation of the FATCA reciprocal reporting requirements. These FATCA reporting requirements are common to all similar agreements and will provide similar obligations across the Caribbean. The implications of these provisions will apply to all U.S.-based Caribbean diaspora members with savings accounts in their countries of nationality that fall within the reporting criteria. These criteria are set out briefly below.

It should be noted, the reciprocal information exchanged between the U.S and Jamaica must be used strictly for tax purposes, and both countries have agreed to maintain the highest level of confidentiality in handling of the shared information. The information on Caribbean Diaspora (U.S. citizens and residents) depositors that will be shared with the U.S. Government include: the name, date of birth, address, telephone number, and tax identification number (such as social security number). The IGA sets out the level of strict due diligence required of financial institutions to know their customers (KYC standards), and these standards are to be applied to new accounts as well as all qualifying accounts on record as of June 30, 2014. The reporting requirement is retroactive and reciprocal. Caribbean financial institutions must have in place the capabilities to identify these depositors.

The criteria for reporting not only establish non-concealment of beneficial ownership of each account but also set limits on qualifying amount of each deposit subject to reporting. Pre-existing Jamaican accounts with a balance or value that does not exceed US$50,000 as of June 30, 2014 are exempt from the reporting requirements. The amount of interests paid to affected accounts during each calendar year must be reported. There are specific rules with regard the treatment of Jamaican retirement accounts (not discussed here). Also, Cash Value Insurance Contract or Annuity Contract with a value of US$250, 000 or less is exempt. Furthermore, There are enhanced review procedures for pre-existing individual accounts with a value or balance in excess of US$1,000,000 as of June 30, 2014 (details on the treatment of such accounts are not discussed here).

By no means is this article intended to be exhaustive of the obligations required of any particular FATCA IGA and the obligations it creates on foreign governments or on foreign financial institutions. Neither is this article to be regarded as providing professional advice to U.S. citizens and residents holding foreign accounts, or exhaustive of any U.S. taxpayer’s obligations. I urge all members of the Caribbean diaspora in the United States holding foreign accounts to seek professional advice on the obligations resulting from implementation of FATCA across the Caribbean.

In seeking professional advice, enquire of the tax professional if he or she is competent to advise on the implications of the FATCA on foreign-held accounts, in general, and, in particular on the specific account in question. Bear in mind reporting on foreign deposit accounts begin on January 1, 2017; and don’t forget reporting is retroactive to June 2014. Closing overseas accounts now won’t reduce tax obligations on qualifying accounts.

Ambassador Curtis A. Ward, B.A., J.D., LL.M., is an attorney and international consultant, and Adjunct Professor in the Homeland Security Graduate Program at the University of the District of Columbia. As former Ambassador of Jamaica to the United Nations he served two years on the U.N. Security Council. He was Expert Adviser to the UN Counter-Terrorism Committee for three years. He specializes in terrorism/counterterrorism legal and policy frameworks; anti-money laundering and countering financing of terrorism (AML/CFT); sanctions implementation; crime and security; human rights, rule of law and governance.

Caribbean Financial Sector Challenged by U.S. FATCA Requirements

9 years ago

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by Ambassador Curtis A. Ward

Caribbean Financial Sector Challenged by U.S. FATCA Requirements

Ambassador Curtis Ward

(31 Oct. 2016) — With the January 2017 reporting date fast approaching most Caribbean countries still lack the legal and operational capacities to implement effectively the United States Foreign Account Tax Compliance Act (FATCA) provisions. This situation exists even though Caribbean-wide compliance with adequate capacity to carry out FATCA commitments would be an indication to U.S. banks that Caribbean financial institutions are responsible partners with which to conduct business. Compliance with FATCA requirements should help provide an impetus to U.S. financial institutions (USFIs) to reconsider their approach on the de-risking of Caribbean banks.

The consequences of de-risking resulting in denial of correspondent banking relationships and payable through accounts by U.S. banks will be devastating to the entire region. This emerging threat should serve as a wake-up call for the region to be far more proactive in its approach to consequential bilateral and global issues. From my perspective it seems governments of the region often articulate solutions to problems but fail to act in a timely manner. A discerning observer is likely to conclude that words without action are meaningless.

The goal of FATCA, adopted by the U.S. Congress in 2010, is “to improve international tax compliance through mutual assistance in tax matters based on an effective infrastructure for the automatic exchange of information.” Non-compliance by any Caribbean jurisdiction creates risks for all. While bank secrecy laws, impediments to transparency and full implementation, have not been resolved to the satisfaction of the United States Government (USG), some Caribbean offshore jurisdictions appear to be moving, albeit slowly, towards compliance. FATCA is complicated in so far as laws, regulations, and operational mechanisms are concerned. However, appropriate technology is easily accessible and technical assistance is available to Caribbean governments from bilateral partners. Caribbean financial institutions appear to be moving much faster than some governments to meet the FATCA requirements and be ready by January 2017.

Bank of Jamaica

Countries around the world greeted FATCA as a burden on their financial systems. To some, FATCA’s restrictions were overreach by the USG; others wished to protect bank secrecy laws. While the overreach argument may have some merit, protecting bank secrecy laws is anathema of standards promoted globally in efforts to counter money laundering and financing of terrorism in the post-9/11 period.

In its efforts to identify and prosecute U.S. tax evaders, the USG traditionally has entered into bilateral treaties with practically every country in the world for reciprocal exchange of financial information. Primarily, these instruments are Tax Information Exchange Agreements (TIEAs) and Avoidance of Double Taxation Treaties (ADTTs). FATCA, which provides penalties for non-compliance, is an effort to improve information sharing standards through automatic and “mandatory” reporting. FATCA also reflects USG concerns with proliferation of offshore banking facilities, including in Caribbean jurisdictions, which presumably provide havens for tax evaders.

Among the USG’s concerns is the lack of financial transparency and reporting by offshore banking jurisdictions that invariably contribute to global money laundering and underlying facilitation of international criminal networks. In the post-9/11 period, there are concerns that money laundering and the financing of terrorism, primarily through funds derived from illicit trafficking in drugs, guns, and humans, are facilitated by bank secrecy laws which characterize offshore banking havens. Bank secrecy laws also contribute to corruption of public officials.

Already, U.S. tax laws provide authority to the U.S. Internal Revenue Service (IRS) to tax the income of all U.S. persons derived from world-wide sources, icluding income of U.S. citizens living and working abroad, and to financial assets of U.S. citizens held in foreign financial institutions (FFIs). Some American citizens take advantage of tax-havens, in particular “off-shore financial institutions,” to evade U.S. taxing authority. Some tax evaders also take advantage of bank secrecy laws in offshore banking jurisdictions to money launder ill-gotten gains. FATCA is facilitation of the extra-territorial application and enforcement of U.S. tax laws globally against U.S. citizens and residents.

FATCA raises the bar on reporting by requiring the filing of automatic reports on foreign assets held by U.S. account holders in FFIs, as well as in certain other non-financial entities. The reporting obligation extends to U.S. taxpayers and foreign entities in which U.S. taxpayers hold a substantial ownership interest, and FFIs include banks, investment entities, brokers, and certain insurance entities.

The strength and importance of the U.S. financial system (USFS) in the global financial market place leaves very few options to jurisdictions except to comply with FATCA. Accordingly, it was reported in US Treasury Notes that by April 2016, “112 jurisdictions (were) treated as having a FATCA agreement in effect with the United States, and nearly 200,000 financial institutions (had) registered with the IRS to comply.” However, this is not to suggest that all Caribbean countries have entered into inter-governmental agreements (IGAs) with the USG. (For a list of the status of FATCA IGAs: https://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx).

In the meantime, the FATCA reporting requirements have now become the global standards for financial reporting. Any foreign government failing to enter an IGA with the USG to implement FATCA in their jurisdictions risks being denied access to the USFS and effectively being shut out of the global financial system. FFIs not registered and in compliance with FATCA provisions will be subject to withholding on funds deposited in, or passing through U.S. banks. So far, hundreds of Caribbean FFIs have registered with the IRS.

The FATCA reporting requirements not only created higher levels of due diligence standards to know your customers (KYC) when establishing new accounts, but also created added burden on FFIs to review existing accounts (retroactively to June 30, 2014) in order to determine the U.S. identity, if any, of depositors or beneficial ownership of such accounts. The burden on offshore financial institutions, where bank secrecy laws often hide beneficial ownership of accounts, are even higher.

Most FFIs that are engaged in international financial transactions need access to U.S. financial institutions, including through depository accounts, correspondent banking relationships, and payable through accounts. In order to ensure unimpeded access, foreign governments are forced to enter into FATCA IGAs with the USG and FFIs to register with the IRS. Each Government, Party to a FATCA IGA, is responsible for collecting the information from the domestic financial institutions and submitting the reportable accounts information to the USG. Some FFIs may report directly to the IRS.

The disclosure of the Panama Papers added new pressures on Caribbean countries with “offshore banking” facilities to comply with the FATCA. Disclosures of data linked to The Bahamas’ offshore financial sector have added to the pressure on these Caribbean countries.

In some Caribbean countries, a lack of political will coupled with technical incapacity slowed the compliance process. The USG has offered capacity building technical assistance through the U.S. Treasury Department’s Office of Technical Assistance (OTA). The central mission of the OTA is to assist countries that are committed to building strong anti-money laundering/countering the financing of terrorism (AML/CFT) oversight regimes with monitoring and enforcement capabilities. Capacity-Building technical assistance is offered to countries to assistthem in dealing with the effects of de-risking.

According to the U.S. Treasury Department, the OTA “is initiating new projects and proactively assessing requests for assistance from countries that have expressed concerns about a decline in access to the correspondent banking relationships in their countries….” However, the OTA only provides assistance to governments that are committed to reform their AML/CFT regimes and where the recipient government demonstrated political will.

The pace of compliance across the Caribbean could ultimately affect resolution of other pressing issues, including, as noted above, the effect on Caribbean banks of de-risking by U.S., Canadian, and European banks.

Ambassador Curtis A. Ward, B.A., J.D., LL.M., is an attorney and international consultant, and Adjunct Professor in the Homeland Security Graduate Program at the University of the District of Columbia. As former Ambassador of Jamaica to the United Nations he served two years on the U.N. Security Council. He was Expert Adviser to the UN Counter-Terrorism Committee for three years. He specializes in terrorism/counterterrorism legal and policy frameworks; anti-money laundering and countering financing of terrorism (AML/CFT); sanctions implementation; crime and security; human rights, rule of law and governance.