Stern US Tax Evasion Law Targets Russian Banks

WASHINGTON (VR)— A US law designed to rein in offshore tax evasion by US citizens—the Foreign Account Tax Compliance Act, or FATCA— is set to ensnare Russian banks in near chaos if Russia does not iron out how it will comply with the law in the next few weeks.

The scale of tax evasion and tax avoidance by US corporations and citizens is enormous: a recent estimate pegs the shortfall to federal and state treasuries from corporations’ tax dodging at $184 billion per year, or $1,259 per US tax filer. Meanwhile, individual US citizens, for their part, have parked anywhere from $5-10 trillion dollars out of reach of the IRS (estimates are inevitably fuzzy). FATCA addresses that category alone (not corporate tax evasion, not US and UK institutions soliciting illicit capital flows from elsewhere, etc.), but it threatens extraordinary penalties on foreign banks if they fail to coordinate with US banks to the satisfaction of the US Treasury. And this is how it may generate some chaos in Russia.

For explanation of FATCA and its potential import on Russia, Radio VR’s David Kerans spoke with Joshua Simmons, policy counsel of Washington-based Global Financial Integrity, which conducts authoritative monitoring of illicit capital flows.

Simmons explained that FATCA obliges US banks to withold an extraordinary 30% of all payments to all foreign banks if those banks do not demonstrate that they are taking adequate steps to identify accounts controlled by US citizens by July 1. Full and accurate identification is nearly impossible now, because tax evaders take steps to conceal their identities in shell companies, trusts, etc., so the US is willing to be lenient on foreign banks’ compliance with FATCA for several years, as the international financial community works out how to penetrate banking secrecy laws so as to identify account holders properly.

But the lenience requires the foreign countries to explain to the US how they are working towards FATCA compliance, and this is now a major problem for Russia. Because of recent tensions over Ukraine, the US broke off FATCA negotiations with Russian financial authorities. Consequently, as of July 1, US banks will be required to withhold 30% of all payments made to Russian banks—all because the US suspended negotiations to determine how the Russian side would conform to a US law.

Simmons explained that Russian banks have two options to avoid the 30% hemorrhaging. They can violate Russian banking secrecy laws and show US authorities which US citizens have accounts in Russia (a risky step, of course). Or they can persuade the Russian Ministry of Finance to issue some sort of guidelines towards lifting banking secrecy which (they hope) the US would accept as adequate towards compliance with FATCA. Absent that, the chaos begins July 1.