There’s a new law on the books and it does not bode well for, among others, those with foreign accounts that have not been properly reported to the Internal Revenue Service. The “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2019” (the “Act”) became part of the reconciled National Defense Authorization Act for Fiscal Year 2021 (H.R. 6395) (“NDAA”) . The NDAA was passed by the US Congress on December 11, 2020, only to be vetoed by President Trump. His veto, however, was overridden by the US House of Representatives on December 28, 2020 and then by the US Senate on January 1, 2021.
The Act is merely one set of provisions enacted with the NDAA as part of broad changes to US anti-money laundering, financial crime and tax evasion laws. The Act contains provisions that greatly increase the ability of the US Department of the Treasury and the Department of Justice (“DOJ”) to subpoena account records from foreign banks that maintain correspondent accounts with banks in the United States.
The US Correspondent Bank Account – the Holy Grail
Today’s blog post provides a very brief overview of the power behind this new law. The lynchpin is the “US correspondent bank account”. If a foreign bank wants to be connected to the world’s banking system it must have correspondent accounts. In particular, when a foreign bank wants to hold accounts in US dollars, make USD investments, send or receive wires from the US and so on, that foreign bank absolutely must have a US correspondent bank account. Only a bank licensed in the US can provide it.
Obtaining such an account is not easy. Offshore banks cringe in fear of losing their precious US correspondent bank accounts since losing it will mean denial of access to the US financial system. Strict requirements are imposed by US regulatory agencies on the correspondent relationship and as the rules have become harsher and harsher, US banks have become increasingly reluctant to have any ties with “risky” offshore banks that may result in fines and sanctions being imposed on the US bank. The regulatory environment is now ever tougher and stronger thanks to the Act. Let’s see what it does.
For the relevant text of the Act, see Section 6308 commencing at page 1231 here.
Overview of the Act
The Act grants brand new, very broad subpoena powers to the Treasury Department and DOJ, allowing them to obtain banking information from foreign banks to support criminal investigations (e.g., money laundering, tax crimes), violations of the Bank Secrecy Act (e.g., FBAR violations), the new anti-money laundering rules, and civil forfeitures actions.
Salient provisions of the Act are summarized below:
- The law grants the Treasury Department and DOJ the power to subpoena any foreign bank that maintains correspondent accounts in the US to obtain “any records relating to the correspondent account or any account at the foreign bank, including records maintained outside of the United States.” This means the US government can obtain information from the foreign bank about any account it maintains worldwide.
- Under the new law, standing alone, a foreign country’s secrecy or confidentiality laws will not be sufficient grounds for quashing or modifying a subpoena. So, the Swiss banking secrecy laws, for example, will be a toothless defense.
- A foreign bank that fails to comply with a subpoena may face civil penalties to the tune of US$50,000 per day. In addition, a noncompliant foreign bank will have its correspondent account shut down once the US financial institution is notified of the noncompliance. The US financial institution must terminate any correspondent account within 10 business days of such notice, otherwise the US financial institution itself will face a $25,000 per day civil penalty.
- The Act prohibits any officer, director, partner, employee, etc. of the foreign bank that is served with such a subpoena from notifying the account holder (or any person named in the subpoena) about the existence or contents of the subpoena. Any violation of this nondisclosure requirement is subject to sanctions.
The takeaway – if you have an unreported foreign account, the noose is tightening more and more. Given the harsh sanctions for noncompliance, it is an inescapable conclusion that a foreign bank with a US correspondent bank account will be turning over those records. Be prepared for the foreign bank to throw you under the bus.
Those with unreported offshore accounts do have options to regain US tax compliance. If you would like a consultation to learn more, email me and we can arrange it. email@example.com
Posted February 4, 2021
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