Caribbean international financial service jurisdictions must continue to deal with several external factors as they conduct business. Many of these developments pose challenges to their successful operation. This article will focus on four of the developments: efforts to hold enablers criminally liable; the OECD’s Multilateral Instrument (MLI); automatic exchange of information; and the use of blacklists.

I. Efforts to hold enablers criminally liable

In the last five years, tax authorities and prosecutors in the United States and several EU countries have prosecuted banks and other intermediaries for their roles in conspiring and/or assisting taxpayers to commit tax crimes. The French, Belgian and German prosecutors have all brought cases against Swiss banks. Although long an important international financial services jurisdiction, the United Kingdom government has been at the forefront of initiatives to change the conduct of tax intermediaries or enablers.

The U.S. Department of Justice has been the leader of efforts to prosecute. In May 2014, Credit Suisse pleaded guilty to conspiring to aid and assist U.S. taxpayers in filing false returns and was sentenced in November 2014 to pay $2.6 billion in fines and restitution.

In December 2014, Bank Leumi, an international bank based in Israel, entered into a deferred prosecution agreement after the bank admitted to conspiring from at least 2000 until early 2011 to aid and assist U.S. taxpayers to prepare and present false tax returns by hiding income and assets in offshore bank accounts in Israel and other locations around the world.

Under the terms of the deferred prosecution agreement, Bank Leumi paid the United States a total of $270 million (in U.S. currency) and continues to cooperate with respect to civil and criminal tax investigations.

In February 2016, the Justice Department entered into a deferred prosecution agreement with Bank Julius Baer, which admitted to conspiring with and knowingly assisting U.S. accountholders to hide billions of dollars in offshore accounts and evade U.S. taxes. As part of the deferred prosecution agreement, Julius Baer agreed to pay $547 million (in U.S. currency), including restitution for tax loss arising from the undeclared U.S. related accounts, disgorgement of gross fees paid with respect to these accounts, and a fine for its illegal conduct. In addition to the deferred prosecution agreement, two Julius Baer bankers, both of whom had been fugitives since 2011, pleaded guilty to conspiracy to defraud the IRS, to evade federal income taxes and to file false federal income tax returns.

On Dec. 29, 2016, the U.S. Department of Justice announced that it had reached final resolutions with banks that have met the requirements of the Swiss Bank Program. The Program provided a path for Swiss banks to resolve potential criminal liabilities in the United States, and to cooperate in the Department’s ongoing investigations of the use of foreign bank accounts to commit tax evasion. The Program also provided a path for those Swiss banks that were not engaged in wrongful acts but nonetheless wanted a resolution of their status. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the Program.

On April 27, 2017, the Criminal Finances Act 2017 received royal assent in the United Kingdom. It became effective in September 2017. It contains several provisions that will significantly alter the investigation and enforcement of corporate crime in the U.K. and establishes a new offense for tax professionals, such as solicitors and accountants, rendering tax advice.

The law contains two new offenses for failure-to-prevent: the failure to prevent facilitation of domestic tax evasion and the failure to prevent facilitation of foreign tax evasion. If a person who is “associated with” a relevant body commits a foreign or U.K. tax facilitation evasion offense, the relevant body will be vicariously liable. The law defines an “associated person” to include an employee, agent or any other person performing services on behalf of the relevant body. The Director of Public Prosecutions or Director of the Serious Fraud Office (SFO) must approve a prosecution.

Section 45 criminalizes: (i) being knowingly concerned in, or acting with a view to, the fraudulent evasion of tax by another person, and (ii) aiding, abetting, counselling or procuring the commission of a tax evasion offense.

Section 46 criminalizes a “foreign tax evasion facilitation offense,” meaning non-U.K. tax evasion by a U.K. company. It applies where the relevant entity has a nexus with the U.K., and it consists of conduct which (i) amounts to an offense under the law of a foreign country; (b) relates to the commission by another persons of a foreign tax evasion offense under that law; and (ii) would, if the foreign tax evasion offense were a U.K. tax evasion offense, amount to a U.K. tax evasion facilitation offense. Hence, the act must fulfill a dual criminality test.

The Act provides for a reasonable prevention procedures defense, which emulates Section 7(2) of the Bribery Act 2010. According to the HMRC draft guidance, “if a relevant body can demonstrate that it has put in place a system of reasonable prevention procedures that identifies and mitigates its tax evasion facilitation risks, then prosecution is unlikely as it will be able to raise a defense.” Under Section 47(1) and (2), the Chancellor of the Exchequer (“the Chancellor”) must prepare and publish guidance about procedures that relevant bodies can put in place to prevent persons acting in the capacity of an associated person from committing U.K. tax evasion facilitation offenses or foreign tax evasion facilitation offenses and may from time to time prepare and publish new or revised guidance to add to or replace existing guidance.

The implications of legislation criminalizing acts of the enablers who participate in structuring and tax planning are that intermediaries, especially in countries such as Switzerland and the U.K., are increasingly wary of creative, proactive planning advice that may run afoul of the laws of foreign countries, especially since such violations can involve criminal sanctions, including imprisonment, huge fines and loss of reputation. The prosecution of banks is causing banks and financial institutions, including ones in the United States, to inquire of law firms and fiduciaries for their own anti-money laundering due diligence policies. Already, the EU’s proposed anti-money laundering directive would also extend the definition of the covered financial institutions and products, so that a very large number of persons will soon be covered.

II. Automatic exchange of information (AEOI)

The Common Reporting Standard (CRS), developed in response to the G20 request and approved by the OECD Council on July 15, 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
Now that the last details for the OECD’s common transmission system to facilitate the exchange of data gathered under the automatic information exchange standard have been finalized, data will start flowing between early adopter countries in September 2017.

In the second week of August, the common transmission system was launched at OECD headquarters in Paris, with 136 delegates representing 57 jurisdictions present. The Global Forum will also focus on getting the rest of its members to commit to the CRS, according to Bhatia, who noted that of the 145 members, only 43 have not yet followed suit. The impact of the CRS, along with the U.K. equivalent regime (commonly referred to as UK CDOT) that is in place between the U.K. and the 10 Crown Dependencies (CDs) and Overseas Territories (OTs), and FATCA, has been to raise financial regulatory costs significantly, especially since many small jurisdictions had to invest in studying FATCA, UK CDOT and the CRS, enact laws and regulations, conclude agreements (e.g., FATCA Intergovernmental agreements, CoE/OECD Convention on Mutual Administrative Assistance in Tax Matters), and purchase and develop software to make the exchanges.

Some jurisdictions, such as the Bahamas, had to make additional expenditures. The Bahamas does not even have a Commission of Inland Revenue, since it does not have an income tax. Some jurisdictions that have prioritized and marketed financial confidentiality as an attribute of their international financial services. The AEOI deprives the jurisdictions of the attribute. Another implication of the AEOI is that Caribbean jurisdictions are subject to evaluations of their compliance with AEOI, which requires substantial preparation and follow-up work.

The most important implication is that the most important competitor on trusts and wealth management – the U.S. – has not signed the CRS and there are no prospects that it will sign it in the next few years. Because of its superpower status, none of international organizations, such as the OECD, or informal groups, such as the Financial Action Task Force, will dare put the U.S. or states on the blacklist or take countermeasures against them, even though wealth structures and fiduciary firms are flooding into Delaware, Nevada, South Dakota and Wyoming to take advantage of the anonymity afforded by the knowledge that the U.S. is not and will not be part of the CRS and hence the names of beneficial owners will remain unreported. The U.S. advantage is helped by lack of entity transparency laws in the U.S. and comparatively light reporting on luxury real estate, although recent FinCEN regulation now requires reporting in some metropolitan and border areas for certain luxury purchases. As a result of the advantages of the U.S. states and the lack of a level playing field in the implementation of the AEOI, the small Caribbean jurisdictions will continue to lose market shares to the United States.

III. Multilateral Instrument (MLI)

One Caribbean jurisdiction, Barbados, has developed its international financial services around building a tax treaty network. Counting the CARICOM double tax treaty, Barbados has 43 tax treaties in effect.

The OECD MLI, which is part of the OECD Base Erosion Profit Shifting initiative, will limit the tax planning opportunities. The MLI, titled the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting,” addresses treaty shopping and provides jurisdictions with the mechanisms to fight tax avoidance by multinational enterprises. In November 2016, the OECD adopted the MLI to provide signatories with a quick way to implement the treaty-related recommendations of the BEPS project, and held an MLI signing ceremony on June 7. As of Aug. 30, 2017, the OECD now has 70 signatories to its multilateral instrument (MLI), covering 71 jurisdictions, and is actively working with an additional 30 to 40 countries to get them ready for signature as soon as possible, according to an OECD adviser.

Given the fact that 99 countries have participated in the process and are likely to sign the MLI, it may amend a very large percentage of the world’s existing and future bilateral tax treaties so that they are consistent with BEPS treaty-based recommendations.

All signatories have adopted the default principal purpose test (PPT) and 12 jurisdictions will supplement the PPT with the MLI’s simplified limitation on benefits provision. The PPT and LOB provisions will make treaty shopping more difficult and limit the use of the Barbados tax treaty network.

IV. Blacklisting

A formidable challenge for Caribbean jurisdictions with international financial sectors has been the growing use of blacklists. In addition to the OECD, FATF, EU, and national blacklists, even subfederal units have blacklists. The G-7 and G-20 have endorsed and called on countries to use blacklists.

FATF Rule 19 states as follows: “Countries should be able to apply appropriate countermeasures when called upon to do so by the FATF. Countries should also be able to apply countermeasures independently of any call by the FATF to do so. Such countermeasures should be effective and proportionate to the risks.”

The EU has its own blacklists. On May 20, 2015, the EU adopted a new framework on AML/CFT. The new rules consist of: (a) Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the 4AMLD”); and (b) Regulation (EU) 2015/848 on information accompanying transfers of funds (“FTR”).

Art. 9(1) of 4AMLD states that third-country jurisdictions which have strategic deficiencies in their AML/CFT regimes and that pose significant threats to the financial system of the EU (“high-risk third countries”) must be identified in order to protect their proper functioning of the internal market. Art. 9(2) of the Directive authorizes the Commission to adopt delegated acts to identify those high-risk third countries, taking into account strategic deficiencies and laying down the criteria on which the Commission’s assessment is to be based.

Article 18(1) of the 4AMLD calls on obliged entities to apply enhanced customer due diligence measures when establishing business relationships or carrying out transactions with natural persons or legal entities established in listed countries.

On July 14, 2016, the European Commission adopted the Delegated Regulation (EU) 2016/1675, which for the first time identified high-risk third countries with strategic deficiencies. The Commission took into account the most recent FATF Public Statement, FATF documents (Improving Global AML/CFT Compliance: on-going process).
The Regulation has been in force since September 23, 2016.

In July 2016, G20 countries called on the Global Forum to devise objective criteria to identify jurisdictions that have not made sufficient progress toward a satisfactory level of implementation of the agreed international standards. These include those on Exchange of Information on Request (EOIR) and Automatic Exchange of Information (AEOI).
The OECD-hosted Global Forum on Transparency and Exchange of Information for Tax Purposes was asked to prepare a list of non-cooperative jurisdictions for the G20 Leaders’ Summit in Hamburg in July 2017.

Several countries have their own blacklists for tax and money laundering issues which apply primarily to IFCs. An example is Section 311 of the USA PATRIOT Act (Special Measures for Jurisdictions, Financial Institutions, or International Transactions of Primary Money Laundering Concern).

Section 311 of the USA PATRIOT Act provides the Secretary with a range of options that can be adapted to target specific money laundering and terrorist financing risks most effectively. These options provide the Treasury Department with a powerful and flexible regulatory tool to take actions to protect the U.S. financial system from specific threats.

An example of the application of Section 311 to a Caribbean jurisdiction concerning an international financial program is on May 20, 2014, the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) issued an advisory to alert financial institutions that certain foreign individuals are abusing the Citizenship-by-Investment program to facilitate financial crime.

FinCEN said it was issuing the advisory to alert financial institutions that certain foreign individuals are abusing the St. Kitts and Nevis (SKN) Citizenship-by-Investment program to obtain SKN passports in order to engage in illicit financial activity. Financial institutions can mitigate exposure to the risk through customer due diligence, including risk-based identity verification consistent with existing customer identification program requirements.

Notwithstanding all of the tax and regulatory carve-outs the federal and state governments provide to attract foreign investment, seven U.S. states have enacted anti-tax haven legislation. The laws seek to expand the scope of state taxation to encompass income earned by foreign subsidiaries in countries that a state defines as tax haven jurisdictions.

Even though the Treasury includes states in TIEAs with Canada and Mexico and the Multilateral Convention on Administrative Assistance in Tax Matters, Treasury tells foreign jurisdictions that it has no authority to intervene in state taxation. Some states have issued blacklists based on lists that the OECD has not maintained for over a decade. These lists are arbitrary and non-manageable. States continue to develop new legislation even though the laws bring reduced business employment and investment, potential foreign retaliation, and constitutional challenges.

V. Analysis

A result of the continued application of new extraterritorial financial regulatory, compliance, and enforcement laws is a diminution of international tax planning, since providing international tax advice, especially creatively, is becoming an increasingly risky business.

Meanwhile, the costs of applying tax transparency, anti-money laundering, terrorist financing, economic sanctions and anti-corruption measures has imposed an inordinate burden on small jurisdictions, especially since they are subject to countermeasures if they do not have good scores when they are evaluated.

Unless Caribbean jurisdictions can force international organizations and informal groups using mutual evaluations and countermeasures to apply regulations on a level playing field, the Caribbean jurisdictions will have trouble meeting all the new international financial regulatory requirements. As long as the international financial community continues to be indifferent to proper governance and inclusion of a broad set of countries worldwide, and the Caribbean has no seat on the G-7, G-20, the OECD, the FATF and the EU, it will have difficulty meeting these requirements.

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Bruce Zagaris

Bruce concentrates his practice in tax controversy and international criminal law. His tax controversy work has included representing individuals on voluntary disclosures, audits, and litigation as well as consulting and serving as an expert witness in criminal trials for defendants and the U.S. Government. Since 1981, he has also represented foreign governments in international tax and financial services, including advising and helping negotiate income tax and tax information exchange agreements. He has also written a number of books and articles, and is an adjunct professor. Bruce is founder and editor of the International Enforcement Law Reporter.

Bruce Zagaris
Berliner Corcoran & Rowe LLP
Washington, D.C.
United States

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