FATCA: The G20 and the OECD – where are they?

FATCA, or the Foreign Account Tax Compliance Act, is a U.S. law that requires banks and financial institutions located abroad to report on deposits and financial assets of U.S. taxpayers, thus extending the rule of US fiscal legislation and making banks and countries worldwide U.S. tax collectors.  

The U.S. can impose this law because the dollar’s status as an international currency of exchange requires that banks and financial entities have deposits and exchange transactions with the banks located in the U.S. By not submitting to FATCA, transactions conducted in the U.S. are subject to a withholding tax of 30 percent; this compels them either to comply or withdraw from international business. 

The intergovernmental agreement (IGA) was created purposely to soften the fierce opposition of the global banking industry to the enormous costs of its implementation and to avoid violating various countries internal laws regarding privacy of information. The Federation of European Banks calculates that FATCA compliance will cost $7.5 billion solely for its 30 largest banks. The intergovernmental agreements between nations allow banks to provide the information to their respective governments, who would in turn make it available to the U.S. government. The IGA also offers the incentive of reciprocity under which the U.S. will in return provide information about the accounts of those countries citizens’ in their banks.

However, that promise of information reciprocity has strong opposition from the U.S. banking industry, because of the high cost of implementation and maintenance, and the fear that many foreign deposits would be lost. The United States is actually the world’s largest fiscal paradise, and their banks hold approximately two trillion dollars in foreign monies for which taxes are neither paid, nor reported. As an interesting parallel, the Spanish name for the parasitic vine that imprisons and sucks the sap and life from the host tree, is spelled “Higa”, pronounced IGA. Of course, the IGA does not include removing the famous Qualified Intermediary Agreement between the foreign financial intermediary and the IRS that guarantees full secrecy of the identity of their customers who invest in the U.S. economy. Foreign companies and individuals, meanwhile, had ownership stakes in U.S. companies valued at $2.9 trillion.

Foreigners had $4 trillion worth of assets in U.S. bank and brokerage accounts. Altogether, foreign-owned assets in the United States totaled $25.16 trillion.
FATCA directly affects six million U.S. residents in foreign countries who have great difficulties utilizing local banking services because of the sheer number of controls imposed.

These controls – even before FATCA came into existence – are responses to banks’ fears that U.S. clients can be accused of not paying taxes in the U.S., thus possibly implicating the bank as an accomplice. Of those six million expatriate U.S. citizens, some work in U.S. businesses, but the vast majority are emigrants. The impact of FATCA’s announcement has already provoked massive renunciations of U.S. citizenship, to the point that some senators are introducing bills to halt them; some are even proposing the extreme measure – never before witnessed in that country – of the establishment of a “departure tax.” Threats are being made that such groups or individuals will never again be able to travel to the U.S. It is unthinkable that should the U.S. convert such a policy into law, it would in effect be in violation of article 13 of the Universal Declaration of Human Rights concerning the right to emigrate.

Why has neither the OECD nor the G20 taken a stand on FATCA, whose existence constitutes a clear violation of international law and which will cause worldwide increase in the cost of banking services? Both the OECD and the G20 require that member countries comply with international standards, one of which is the factor of residency for the collection of taxes, including universal income. This means that under the universal tax system, a citizen of Europe, Mexico, China, India, Japan, etc., pays taxes to their country of residence. For example, a Mexican who lives in France does not have to pay taxes in Mexico but in France, his country of residence. (Panama does not use universal taxation system; rather, it applies only a territorial system.) In contrast, the U.S. violates this international standard and taxes its citizens wherever they reside, and implementation of FATCA will require that the rest of the world become tax collectors for the U.S.

It is difficult to justify the fact that both the OECD and the G20 have ignored the non-compliance of the U.S. with the basic international standards. To add to the absurdity, the Global Forum created by the OECD supposedly to verify compliance “certified” that its principal member is actually in compliance. This they have done even though the U.S. is the world’s greatest tax haven, giving no information to third countries on the U.S. investments of their citizens, who then cannot be taxed in their countries of residence. In addition, the U.S. has more than seven thousand financial intermediaries in what are called “Qualified Intermediary Agreements” (QIA) in which the IRS guarantees them total secrecy for the identity of their clients. Those identities are unknown even to the IRS agency, thus, of course, the U.S. cannot provide foreign countries with information they do not have.

But that is not all. How can it be explained that the Global Forum also overlooked the fact that the U.S. does not comply with the international standard requiring disclosure of the identities of the final beneficiaries of juridical persons. It would seem that those who examined the U.S. case ignore the U.S. Government Accountability Office (U.S. GAO) reports on all types of financial offenses, money laundering, tax evasion and other criminal offenses attributed to U.S. corporations. The study, “Company Formations Minimal Ownership Information” is readily available and has served as basis for legal projects proposed by Senator Levin in four legislatures. Among other points, this explosive study pointed out the following facts regarding U.S. corporations:   

  • Nearly 2,000,000 corporations and limited liability companies are being formed under the laws of the states each year.
  • Very few states obtain meaningful information about the beneficial owners of the corporations and limited liability companies formed under their laws.
  • (3) A person forming a corporation or limited liability company within the United States typically provides less information to the state of incorporation than is needed to obtain a bank account or driver’s license and typically does not name a single beneficial owner.
  • Criminals have exploited the weaknesses in state formation procedures to conceal their identities when forming corporations or limited liability companies in the United States, and have then used the newly created entities to commit crimes affecting interstate and international commerce such as terrorism, drug trafficking, money laundering, tax evasion, securities fraud, financial fraud and acts of foreign corruption.
  • Law enforcement efforts to investigate corporations and limited liability companies suspected of committing crimes have been impeded by the lack of available beneficial ownership information, as documented in reports and testimony by officials from the Department of Justice, the Department of Homeland Security, the Financial Crimes Enforcement Network of the Department of the Treasury, the Internal Revenue Service, and the Government Accountability Office, and others.
  • In July 2006, a leading international anti-money laundering organization, the Financial Action Task Force on Money Laundering (FATF), of which the United States is a member, issued a report that criticizes the United States for failing to comply with a FATF standard on the need to collect beneficial ownership information and urged the United States to correct this deficiency by July 2008

The G20, composed of the most important economies in the world, and the “club” of rich countries that make up the OECD, should demand that their principal member comply with the international standards, eliminating FATCA and QIA and approve with no further delay Senator Levin’s projected law “Know Your Client.”

By universal right and under the principle of fair competition in a global economy, all nations of the world, big and small, have the freedom to choose their own tax systems. Under this light, we condemn the hypocrisy of the U.S. as the ultimate power behind the OECD, the double standards and the shameful scheme to eliminate legitimate competition from smaller financial centers who are not members of this club. In an unprecedented interconnected world with ample access to instant information these facts can no longer be concealed and are becoming a stain on the record of the OECD and the history of the U.S.

It is time the world makes the U.S. realize that there are international norms and standards which demand respect and that it should return to being the example of freedom, justice and democracy its forefathers bequeathed to the world. The OECD must not continue to mock the international community; they should cast off the role of “Cartel” strategizing to promote the businesses of their particular partners, and stop intimidating and bullying those countries outside of their fraternal “club”.



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Eduardo Morgan Jr.

Eduardo Morgan Jr. joined Morgan & Morgan since 1961 and is currently a Senior Partner and COB of the Board of Directors of the firm. As part of his experience, Mr. Morgan Jr. was Ministry of the Interior and Justice in 1968, and a personal envoy of the President to the government of Japan from 1979 to 1982. He was also Ambassador of the Republic of Panama in Washington D.C., United States of America, from 1996 to 1998. At present, he is Chairman of the Conflict Resolution Center for the Americas and the Caribbean, a member of the Board of Directors of the Panama-Israel Institute of Culture and Chairman of the Panama-Argentina Friends Association.  Dr. Morgan is the author of several books, including "The Contentious-Administrative Resources for Annulment and full jurisdiction under Panamanian law", "The Panama Canal, Benefit and Control. A Policy Oriented Approach", "The Future Sea Level Canal", and "Memories of an Embassy". He has published internationally a large number of articles and participated in various forums on financial issues of great relevance to the Panamanian economy.  The international publication "Chambers Global, The World's Leading Lawyers for Business" in its editions 2009, 2010 and 2011, has recognized Eduardo Morgan Jr. as a “Leading Individual” in the following Corporate & Commercial law fields: Merges & Acquisitions, Project Finance and Government Contracts.

Eduardo Morgan Jr.
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