Grey matters


Exporting FATCA
Joshua D. Blank and Ruth Mason

142 Tax Notes (forthcoming 2014), available at 



The Foreign Account Tax Compliance Act (FATCA) represents a powerful response by the United States to flagrant offshore tax evasion. Although the new reporting regime has been criticized as unilateral and extraterritorial, this short article, prepared for a symposium hosted by Pepperdine Law Review, shows that multilateralism and cooperation so far have been the keys to implementing FATCA. In addition to spurring bilateral Intergovernmental Agreements (IGAs) to implement FATCA, and copycat legislation in other jurisdictions, for many countries the FATCA reporting requirements represent an aspirational new global standard for automatic exchange of information – one that would supplement, if not replace, information exchange on request.

CFR comment: 

This brief article (well, brief for law professors – 13 pages) presents an alternative view of FATCA. While early commentary focused on the unilateral aspects of the extension of U.S. regulation to non-U.S. financial entities, the authors make a compelling case that the FATCA is spurring global convergence on FATCA-like processes. While CFR thinks this is a huge step backward in promoting an efficient international financial system, this may be an important consequence of FATCA.



Modern trends in minimization of offshore jurisdiction: OECD, G20 and Russia
G. Korolev and Antonina Levashenko

Russian Economic Developments 2014, #1, pp.46-48 available at



For many years, offshore zones were a reliable mechanism of tax optimization. According to experts’ estimates, Russia is the world’s leader as regards the number of newly registered offshore companies. For the purpose of effective prevention of erosion of the tax base, the paper argues that Russia should join not only the OECD standards, but also that international organization, as well.

CFR comment 

This brief article sets out a Russian perspective on tax structuring using OFCs and surveys some of the challenges facing the Russian government in controlling such structures.



Bounties for bad behavior: Rewarding culpable whistleblowers under the Dodd-Frank Act and Internal Revenue Code
Jennifer M. Pacella

Available at 



This article explores an area that has not received much scholarly attention: the rationale behind providing bounties to whistleblowers who have unclean hands and the differences between federal whisteblower programs in this regard. After analyzing the history and structure of the IRS and SEC programs and the public policy concerns associated with rewarding culpable whistleblowers, this article concludes with various observations justifying and supporting the SEC model. This article critiques the IRS’s practice of including the criminally convicted among those who are eligible for bounty awards by suggesting that the existence of alternative whistleblower incentive structures, such as leniency and immunity, are more appropriate for a potential whistleblower facing a criminal conviction. In addition, the IRS model diverges from the legal structure upon which it is based, the False Claims Act, which does not allow convicted whistleblowers to receive a bounty. In response to potential counterarguments that tax fraud reporting may not be analogous to securities fraud reporting, this article also explores the SEC’s recent trend of acting increasingly as a “punisher” akin to a criminal, rather than a civil, enforcement entity like the IRS. In conclusion, this article suggests that the SEC’s approach represents a reasonable middle ground that reconciles the conflict between allowing wrongdoers to benefit from their own misconduct and incentivizing culpable insiders to come forward, as such persons often possess the most crucial information in bringing violations of the law to light.

CFR comment 

The receipt of a $104 million bounty by UBS whistleblower Bradley Birkenfeld, along with a forty-month prison sentence, is the foil this excellent article uses to compare different whistleblower reward schemes under U.S. law. Some allow whistleblowers with unclean hands like Birkenfeld to receive bounties; others do not. 



Mapping the shadow banking system through a global flow of funds analysis
Luca Errico, et al.

IMF Working Paper No. 14/10 (January 2014), available at



This paper presents an approach to understanding the shadow banking system in the United States using a new global flow of funds (GFF) conceptual framework developed by the IMF’s Statistics Department (STA). The GFF uses external stock and flow matrices to map claims between sector-location pairs. Our findings highlight the large positions and gross flows of the U.S. banking sector (ODCs) and its interconnectedness with the banking sectors in the Euro area and the United Kingdom. European counterparties are large holders of U.S. other financial corporations’ debt securities. We explore the relationship between credit to domestic entities and the growth of non-core liabilities. We find that external debt liabilities of the financial sector are pro-cyclical and are closely aligned with domestic credit growth.



Is the OVDP a good deal? Assessing the OVDP in terms of FBAR willfulness
Eliezer Mishory


Available at 


This note argues that the OVDP’s value depends on the taxpayer’s exposure to willful FBAR penalties. This note also provides a guide to willfulness in FBAR violations. The OVDP is a program that the IRS adopted as part of its recent crackdown on taxpayers with undisclosed offshore bank accounts. The OVDP provides taxpayers with amnesty from willful FBAR penalties. On the other hand, entering the OVDP can be an expensive and protracted ordeal. For taxpayers with a high risk of facing willful FBAR violations, the OVDP is a good deal. For other taxpayers, the OVDP is an unnecessary ride. Deciding whether or not to enter the program is difficult because there is a dearth of guidance regarding what makes an FBAR violation willful. There are very few criminal FBAR cases and there are only two civil FBAR cases. This note examines judicial guidance on willfulness in other contexts and extrapolates principles of willfulness that apply to FBAR violations. Using these principles, this note examines the FBAR cases to identify current judicial thinking on FBAR willfulness. This exercise indicates that there is currently a strong inclination to find that FBAR violations are willful. This makes entering the OVDP more compelling and a better deal for taxpayers than it may seem.  

CFR comment 

This student-authored article is a concise guide to the concept of willfulness as applied by the U.S. Internal Revenue Service in its analysis of U.S. taxpayers’ liability for unreported foreign accounts. It is an excellent guide to the issue, drawing on a wide range of materials to supplement the sparse judicial guidance available.    



Multinationals’ offshore operations, tax avoidance and firm‐specific information flows: International evidence
Jeong-Bon Kim V and Tiemei Li

Journal of International Financial Management & Accounting, Vol. 25, Issue 1, pp. 38-89, 2014 abstract only available at
Using a large sample of multinational enterprises (MNEs) over the period 1999-2009, this study investigates whether and how offshore operations via offshore financial centers (OFCs) impact the extent to which firm-specific information is incorporated into stock price, relative to common information. Our analyses show that, irrespective of whether a firm is a Type I offshore firm (directly having headquarters registered in OFCs) or a Type II offshore firm (indirectly setting up subsidiaries in OFCs), the amount of firm-specific information flowing into stock price is lower for offshore firms than for non-offshore firms. It also finds that as offshore firms become more aggressive in their tax avoidance strategies their stock prices impound a lower amount of firm-specific information relative to common information. Finally, it finds that a strong offshore proclivity also deters firm-specific information flows, thereby driving up stock price synchronicity. The results suggest that the opaque and complex nature of business and financial transactions in OFCs, coupled with their institutional characteristics, that is, weak and flexible legal enforcement, zero or extremely low taxation, and low litigation risk, provide offshore firms with not only stronger incentives but also the opportunities and means to adopt opaque disclosure policies and aggressive earnings management.


CFR comment 

The authors show, using some sophisticated statistical analysis, that stock prices of firms with an offshore presence have a smaller individual price variance component than firms without such a presence. In other words, OFC-connected public firms’ stock prices are more correlated with industry stock market trends than non-OFC connected firms’ stock prices. We’re not sure that proves the larger point: that “excessive secrecy” and “weak and flexible law enforcement” in OFCs mean there is less information available to investors in OFC-connected firms. Indeed, we don’t think there is “weak” law enforcement in most OFCs relative to onshore jurisdictions. But expect this argument to become part of the anti-OFC campaigners’ arsenal.


Offshore financial centers in the Caribbean: An overview
Michael Brei


Available at 


This paper investigates offshore financial centers in the Caribbean from the perspective of offshore economies, onshore economies and international investors. Using multilateral data on the international positions of banks, we analyze the flow of funds that has been transferred from the major banking systems to offshore financial centers located in the Caribbean and vice versa. We highlight that Caribbean offshore financial centers have been predominantly used by persons, resident in the United States, which send and receive most of the offshore funds, a process called round-tripping. For the major player in the Caribbean, the United States, we find that increases in offshore funds have been associated with reductions in corporate income tax revenues. These costs, however, have to be put into relation with the potential benefits, in the form of higher lending by commercial banks located in the United States.

Along with the empirical analysis, we analyze the advantages and disadvantages of offshore financial centers from the perspective of offshore and onshore governments, and international corporations and investors. In particular, we provide a review of the international tax legislation, focusing on activities and investments in traditional offshore centers, treaty heavens and special concession havens. Although the vast majority of offshore transactions seem to be perfectly legal, there exist concerns that particular corporations and individuals might misuse offshore financial centers. For this reason, we discuss as well the major international initiatives on countering the harmful practices in offshore centers and tax havens.

CFR comment 

This is a rarity indeed – a paper by a continental analyst (and a French one at that) that recognizes there are benefits as well as costs to international financial transactions. Using non-public Bank of International Settlements data, the paper shows both reduction in corporate tax collections and benefits from increased lending in countries where funds flow to OFCs. We hope publishing this paper does not result in Prof. Brei being audited by the French tax authorities!



Data sovereignty and the cloud: A board and executive officer’s guide
David Vaile, et al.


UNSW Law Research Paper No. 2013-84, available at  


With NextDC support, this was the first comprehensive comparison and analysis of the legal, technical and risk governance issues arising from the increasing use of ‘Cloud’ based data hosting, using criteria relevant to governance level decision making and risk management.

This research and policy report examines the technology of the cloud, insurance risk issues around “data sovereignty,” approaches to assess and minimize this risk, comparisons of legal means of accessing data held by Australian companies under local and U.S. jurisdiction (where many cloud services originated), and options for including these issues in existing organizational data risk analysis and management processes. European perspectives are also considered. Researchers investigated the comparative impact of laws and administrative and law enforcement practices in Australia, the U.S. and other possible cloud venues, including rules under the Patriot Act and the Foreign Intelligence Surveillance Act in the U.S. and the Telecommunications Act and related legislation in Australia. The focus is not on a definitive conclusion but on enabling those involved to conduct a careful examination of their data, the requirements of those affected by the data, and the impact of various potentially unwanted intrusions into expectations of security, confidentiality and privacy. The relevance of onshore versus offshore hosting is considered, and the effect of foreign control of entities hosting locally.

CFR comment 

The NSA is listening. So are the British, French, German, Chinese, and Russian intelligence services. And everybody else. This is a useful guide, with an Australian flavor.


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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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