Unit 1: Putting the squeeze on Miami Vice

(by M.V. | NEW YORK Jan 17th 2014)

It has become a lot less comfortable to be an American with an undisclosed offshore bank
account in recent years, thanks to the federal prosecutors who have harried foreign moneymen
and lawyers suspected of aiding tax evasion, particularly in Switzerland. Now life is also about
to get harder for non-Americans who dodge their fiscal obligations at home by stuffing savings
in American banks.

Forced to offer some degree of reciprocity as it hounds other countries for information on
American tax cheats, the Internal Revenue Service (IRS1) drew up a rule in 2012 that would, for
the first time, force American banks to cough up data on “non-resident aliens” who hold
accounts with them. This would then be passed on to tax authorities in the account-holders’
home countries.

This gave rise to much huffing and puffing from banks which hold a lot of Latin American
money, for instance in Miami's financial district. The banking associations of Florida and Texas
jointly sued the feds, claiming the regulation was overly burdensome and could lead to massive
capital flight because legitimate customers might fear their information would be disclosed to,
and misused by, rogue governments. This week, a federal court in the District of Columbia
threw out the challenge, clearing the way for the new rule to take effect in March.

The banking associations had argued in their motion for summary judgment that the rule
violated both the Administrative Procedure Act2 and the Regulatory Flexibility Act3. They
contended that the IRS had got its economics wrong and that the new requirement would
cause more harm to banks than the agency had foreseen. In making their case that it might
spark enough capital flight to destabilize local banks and economies, they pointed to the case of
Canada, the only country that already has a reciprocal bank information-exchange agreement
with the United States. When that pact took effect in 2000, they argued, large sums were
pulled from American banks by panicky Canadians

It’s unclear how much money could be affected. The IRS has estimated that foreign individuals
have up to $400 billion in American accounts. Miami’s financial center has the most to fear,
though it has become less accommodating towards dirty money over the past decade, and a
good deal of what remains is thought to have been moved out of banks and into local property.

In a 23-page ruling, Judge James Boasberg swatted aside these arguments, writing that the IRS
had “reasonably concluded that the regulations will improve US tax compliance, deter foreign
and domestic tax evasion, impose a minimal reporting burden on banks, and not cause any
rational actor —other than a tax evader—to withdraw his funds from US accounts.” The judge
accepted the IRS’s contention that the alleged Canadian capital flight was “a fiction”: though
the amount of Canadian interest-bearing deposits dipped after the reporting requirements
were issued, they bounced back shortly afterwards. The court also noted that the IRS will only
pass information on to the 70 countries with which it has information-exchange agreements.
These require signatories to store information responsibly and treat it as secret.

The court ruling also marks a defeat for the numerous senior Florida and Texas politicians who
threw their weight behind the banks, among them Marco Rubio, a United States senator with
presidential ambitions who introduced a bill to kill the regulation.

Had opponents been successful, the government would have found it harder to get other
countries to go along with the Foreign Account Tax Compliance Act (FATCA 4), a law passed in
2010 that requires financial institutions in other countries to report to the IRS funds held by
American customers. FATCA, which is due to come into force in July after several delays, has
supercharged the expansion of a network of bilateral tax-information accords, leaving the tax-
shy with far fewer places to hide. America has done much of the stick-wielding to make this
happen. The court’s ruling this week ensures it will also be able to offer some carrots.