Irs Bank Deposit Limits

Conflicts of interest: resolving legal barriers to the implementation of the Foreign Account Tax Compliance Act.

TABLE OF CONTENTS

I. INTRODUCTION                                               388

II. FATCA: AN OVERVIEW                                        390

  A. Covered Financial Institutions and Entities              392

  B. Reporting and Administrative Requirements                393

  C. Incentivizing Compliance: Penalty Withholding            395

  D. A Counterproductive Solution?                            397

III FATCA CONFLICTS: CASE STUDIES                             399

  A. Switzerland: Resolvable Legal Conflicts, Unavoidable     401
  Economic Conflicts

  B. Cayman Islands: Problematic Legal Precedent?             404

  C. Japan: Reluctance to Modify Legal Customs                407

  D. Mexico: Legal Impediments to Implementation              409

IV. RESOLVING CONFLICTS: MULTILATERAL CORPORATION             411

  A. Treaswy Approach: Intergovernmental Information Sharing  415

  B. Switzerland's RUBIK: Enshrining Banking Secrecy          418

  B. E. U. Savings Directive: Striking a Compromise?          420

V. CONCLUSION                                                 423

I. INTRODUCTION

In April 2009, the Group of Twenty (G20) heads of state declared
that “the era of banking secrecy is over.” (1) The United
States has taken a major step towards translating those words into
action with the enactment of the Foreign Account Tax Compliance Act
(FATCA). (2) Aimed at reducing the estimated $40 billion in revenue that
the U.S. Treasury loses each year due to the use of undeclared foreign
bank accounts and investment interests, (3) FATCA provides U.S.
authorities with a potent tool to penetrate the banking secrecy laws
that enable tax evasion.

FATCA’s drafters recognized that funds stashed in tax havens
rarely remain there undisturbed. (4) Rather, tax dodgers often invest
their capital in countries like the United States that offer the
potential for attractive returns. (5) FATCA latches onto the
cross-border payments associated with this investment activity and
offers a choice to foreign financial institutions: report information
about the recipients of such payments to the Internal Revenue Service
(Service), or face significant penalties. Policymakers hope that this
new reporting regime will identify those who are currently
underreporting their income to the Service and reduce future
opportunities for tax evasion. (6)

FATCA will not operate in a legal vacuum, however. With the arrival
of the law’s January 1, 2013 implementation date, it has become
clear that some of the obligations that FATCA imposes on foreign
financial institutions will conflict with laws and regulations in other
countries. Most obviously, FATCA’s reporting requirements are at
odds with the financial privacy laws of banking secrecy jurisdictions
like Switzerland, but the potential for legal conflicts extends beyond
the countries that are the “usual suspects” of international
tax evasion. Financial institutions located in some of the United
States’s largest trading partners are subject to domestic banking
laws that restrict their ability to comply with FATCA. These legal
discrepancies leave foreign financial institutions in the unfortunate
position of having to choose whether to implement FATCA–and risk
sanctions under local law–or to follow the law of the jurisdiction in
which they operate–and risk the consequences of violating FATCA. Even
where FATCA provides a “workaround” to avoid a formal legal
conflict, the compliance costs associated with its remedies may
constitute a penalty in their own right.

By creating severe compliance challenges for foreign financial
institutions, legal conflicts threaten to undermine FATCA’s ability
to combat tax evasion and increase U.S. revenue collections. Conflicts
work against FATCA’s mission in three ways:

(1) First, conflicts will prevent financial institutions in certain
countries from participating fully in the FATCA program. The U.S. will
not gain access to information about accounts held at these
institutions, and tax evaders may shift their assets from other
countries to nonparticipating banks to avoid having their identities
discovered by U.S. authorities.

(2) Second, financial institutions may decide that the costs of
resolving conflicts with FATCA outweigh the benefits of doing so. To
avoid complying with the law, they may stop doing business with U.S.
individuals and entities and reduce their investments in the United
States. These actions could have a negative effect on the U.S. economy
and Service revenue collections.

(3) Finally, countries may view conflicts with FATCA as creating
unwarranted interference with their sovereignty over domestic banking,
data privacy, and tax administration matters. Concerns about U.S.
“overreaching” could impede progress toward greater
international cooperation on tax enforcement.

To avoid these consequences, U.S. policymakers must harmonize FATCA
with foreign laws. This paper will argue that the most attractive path
to resolving conflicts with FATCA is through a coordinated, multilateral
effort to reduce tax evasion worldwide. Three models for this
multilateral cooperation are appealing: (1) the U.S. Treasury
Department’s proposal to facilitate FATCA compliance through
intergovernmental information sharing on a bilateral or multilateral
basis, (2) the RUBIK proposal created by a coalition of Swiss financial
industry leaders, and (3) a coordination program based upon the existing
European Union Savings Directive (EUSD). Modifying FATCA to embrace any
one of these multilateral approaches would help avoid the legal
conflicts that promise to arise under the current version of FATCA. This
paper will argue, however, that policymakers should restructure FATCA to
resemble the EUSD, as it reconciles the sovereignty interests of foreign
countries with the revenue needs of other states.

Part I of this paper will begin by providing a brief overview of
FATCA, with an emphasis on the elements of the law that have the
greatest potential to conflict with laws and regulations in other
countries. Part II, in turn, will use case studies of Switzerland, the
Cayman Islands, Japan, and Mexico to highlight conflicts that have
already become apparent. Financial institutions operating in these four
jurisdictions–to say nothing of others around the world–will be faced
with daunting compliance challenges if FATCA is not modified. Thus, Part
HI will describe ways to address conflict-of-laws problems by making
FATCA compatible with multilateral coordination initiatives. This
discussion will show that, while FATCA may not eliminate banking secrecy
in the near term, the law has the potential to serve as a catalyst for
greater transparency in international tax matters.

II. FATCA: AN OVERVIEW

Congress began drafting FATCA in the aftermath of a high-profile
tax evasion scandal involving the Swiss bank UBS AG. (7) A 2008
investigation of UBS revealed that as many as 52,000 of the bank’s
American clients used undeclared Swiss bank accounts to avoid reporting
income to U.S. tax authorities. (8) These individuals took advantage of
two features of the cross-border investment landscape: lax withholding
procedures for outbound U.S. interest payments and weak information
exchange arrangements between countries. FATCA was designed to
strengthen U.S. law in both of these areas.

U.S.-source bank and portfolio interest paid to non-U.S. persons is
generally exempt from withholding tax. (9) These withholding exemptions
create incentives for U.S. persons, who would normally be subject to tax
on their interest and capital gain earnings, to make it appear as though
their U.S. income is earned by a foreign person or entity. Achieving
this “transformation” was relatively easy pre-FATCA because
the U.S. withholding system accepted self-certification of residency
status. (10) As the Joint Committee on Taxation explains, by making
fraudulent self-certifications, U.S. investors were able “to
portray themselves successfully as foreign persons, thereby escaping
U.S. income taxation.” (11) Indeed, investigators found that UBS
misled withholding agents about the true residency status of the U.S.
citizens who opened Swiss accounts through the bank. (12)

Although the United States has an extensive network of tax treaties
and tax information exchange agreements (TIEAs) with other countries,
these arrangements have generally been unhelpful in combating tax
evasion through the use of foreign bank accounts. Article 26 of the U.S.
Model Income Tax Convention (13) and most TTEAs provide that foreign
countries are only obligated to respond to specific requests for
information. (14) Itai Grinberg explains: “[I]n order to receive
information upon request, a tax administration is generally required to
name the taxpayer, know which jurisdiction to ask for information, know
at which financial institution a taxpayer may hold her account, and have
a credible suspicion of tax evasion.” (15) These procedural
requirements make it difficult for U.S. authorities to use treaties to
monitor international financial institutions and detect tax evasion. As
a result, the “value of information [exchanged under treaties] is
primarily limited to confirmation rather than discovery of tax
evasion.” (16)

In drafting FATCA, Congress was aware of the lessons learned in the
UBS scandal and the broader U.S. struggle against tax evasion. (17) As
the following Parts will explain, FATCA requires that foreign financial
institutions verify the identity and residency status of their clients
and use that information to ensure proper withholding on outbound U.S.
interest payments. The law also erects an ambitious new automatic
information-reporting regime. FATCA bypasses the outmoded treaty system
to require direct exchange of information between foreign banks and the
Service. To ensure compliance with its identity verification and
reporting requirements, FATCA imposes a punitive withholding tax on
individuals and entities that do not meet the terms of the statute.

A. Covered Financial Institutions and Entities

FATCA affects foreign financial institutions (FFIs) (18) and
nonfinancial foreign entities (NFFEs). (19) The statute defines these
categories in broad terms. The description of an FFI includes any entity
that accepts deposits or holds financial assets as part of a banking
business, as well as firms “in the business of investing,
reinvesting, or trading in securities … partnership interests,
commodities … or any interest” in similar instruments. (20)
According to FATCA’s primary senate sponsor, Senator Carl Levin,
this definition is broad enough to include “banks, securities
firms, money services business, money exchange houses, hedge funds,
private equity funds, commodity traders, derivative dealers, and any
other type of financial firm that holds, invests, or trades assets on
behalf of itself or another person.” (21) FATCA’s expansive
FFI definition makes it difficult to imagine a financial institution
that could offer tax avoidance strategies similar to those peddled by
UBS without falling into the coverage of the statute.

The definition of an NFFE is even broader and includes ‘any
foreign entity which is not a financial institution.” (22) As Part
I.0 will explain, however, FATCA places a relatively light regulatory
burden on NFFEs (at least in comparison to what it requires of FFIs).
Still, the wide range of foreign businesses potentially subject to FATCA
has led U.S. policymakers to develop statutory and regulatory
carve-outs. By its terms. FATCA does not apply to most nonfinancial
publicly traded corporations (23) or to sovereign and intergovernmental
organizations. (24) The Treasury Department has also worked to identify
categories of “deemed compliant” entities that will be
relieved from compliance with the statute. (25)

B. Reporting and Administrative Requirements

FATCA’s principal regulatory requirements are aimed at FFIs.
To avoid the penalty-withholding scheme described below in Part I.C,
covered financial institutions must enter into a contract with the
Service to provide the U.S. government with information about their
account holders and to assist in FATCA administration. (26) With respect
to information reporting, FFIs must agree to:

* Determine whether accounts maintained at their institutions
belong to U.S. persons, using intensive due diligence procedures
described in Treasury regulations. (27)

* Report the following information about accounts held by U.S. (28)
persons on an annual basis:

* The name, address, and TIN of each account holder or, in the case
of any account holder which is a U.S. owned NFFE, the name, address, and
TIN of each substantial U.S. owner of such entity;

* The account number;

* The account balance or value;

* The gross receipts and gross withdrawals or payments from the
account during the year. (29)

If an account holder fails to provide sufficient information for an
FFI to fulfill its reporting obligations, the account holder will be
deemed “recalcitrant” and will be subject to the punitive
withholding tax described below. (30)

FATCA’s drafters recognized that local law in some
jurisdictions (particularly countries with strong banking secrecy
protections) could make it difficult for FFIs to automatically report
client data to the Service. Therefore, FATCA encourages FFIs to request
“valid and effective” waivers of financial privacy protections
from affected clients. (31) Account holders who fail to provide such a
waiver will be deemed recalcitrant and punitive withholding will apply
to their accounts. (32) Furthermore, the statute instructs Ms to close
the accounts of clients who do not provide a waiver of applicable
privacy laws within a “reasonable time” (note that this
account closure requirement does not apply to recalcitrant accounts
unaffected by foreign banking secrecy laws). (33)

Finally, FFIs must agree to assist the Service in administering the
penalty-withholding regime that is meant to incentivize compliance with
FATCA. (34) These obligations are described in greater detail below.
U.S. policymakers hope that by enlisting participating financial
institutions to police their nonparticipating peers, FATCA will
establish a seamless global enforcement network that will be difficult
to circumvent. The automatic exchange of tax information that will be
enabled by this network will be a vast improvement over the information
sharing that is possible under current bilateral tax treaties and will
help ensure that U.S. persons properly declare and pay tax on their
overseas financial assets.

C. Incentivizing Compliance: Penalty Withholding

FATCA’s authors, Representative Charlie Rangel and Senator Max
Baucus, have said that the “bill offers foreign banks a simple
choice–if you wish to access our capital markets, you have to report on
U.S. account holders.” (35) While FATCA does not exactly cut off
access to the U.S. financial system for FFIs that do not enter into an
agreement with the Service, the withholding tax it imposes on
nonparticipating FFIs is a significant burden. For this reason, the
American Bar Association has described FATCA’s withholding
provisions as “a club to force FFIs and others to disclose the
identities of American taxpayers who bank and conduct other business
overseas.” (36)

FATCA imposes a thirty percent withholding tax on the gross amount
of certain U.S.-source payments made to nonparticipating FFIs, (37)
noncompliant NFFEs, (38) and recalcitrant account holders. (39)
Additionally, it requires that participating FFIs deduct and remit a
thirty percent tax on similar payments that “pass thru” their
institution enroute to noncompliant individuals and entities. (40) In
general, withholdable payments include any U.S.-source payment of
interest (including any original issue discount), dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, and other fixed or determinable annual or periodical gains,
profits, and income. (41) Withholding also applies to “any gross
proceeds from the sale or disposition of any property … which can
produce interest or dividends from sources within the United
States.” (42)

FATCA withholding trumps well-recognized exceptions to the
withholding regime for U.S.-source FDAP income, such as the exclusions
for portfolio interest and gross income realized from the sale of
capital property.(43) Some tax attorneys have suggested that the term
“any interest” could even include interest payments that are
generally tax free, such as coupon payments on municipal bonds. (44)
FATCA withholding also applies regardless of any entitlement that the
payment recipient may have to reduced withholding under a treaty,
although the statute provides a mechanism for receiving treaty benefits
by filing a claim for a refund. (45) This procedure requires that the
individual or entity seeking a refund provide the Service with
information to ascertain whether the individual is a U.S. person or has
significant U.S. owners. (46) Commentators have observed that the
“cumbersome” nature of the refund process will create
additional incentives for FFIs to participate in the FATCA regime. (47)

FATCA places legal liability on U.S. withholding agents to
determine if an outbound payment is subject to the thirty percent tax.
(48) This determination will be relatively simple with respect to
payments directed toward two of the categories of noncompliant
individuals and entities to which the withholding requirement applies.
First, the Service will presumably maintain a list of FFIs that have
entered into information exchange agreements. Payments to financial
institutions that do not appear on this list should be subject to
withholding. Additionally, U.S. withholding agents do not appear to be
responsible for deducting the withholding tax on payments to
recalcitrant account holders; FATCA places this collection obligation on
the FFI that harbors the non-complaint account. (49)

The evaluation of payments to NFFEs will be a more involved
process. Payments to NFFEs are subject to the thirty percent withholding
tax unless the beneficial owner of the payment provides the withholding
agent with a certification showing that the NFFE does not have any
substantial U.S. owners. (50) The threshold for “substantial
ownership” is a ten percent interest. (51) If the NFFE has
substantial U.S. owners, it can avoid withholding by providing the
withholding agent with the name, address, and TIN of those owners, which
the withholding agent must transmit to the Service. (52) Even if these
certifications are supplied, withholding will apply unless “the
withholding agent does not know, or have reason to know” that the
information provided by the NFFE is incorrect. (53)

The most complicated aspect of FATCA–the passthru withholding
obligation–falls upon participating FFIs. The statute defines a
“passthru payment” as “any withholdable payment or other
payment to the extent attributable to a withholdable payment.” (54)
This definition is meant to cover payments that are not U.S.-source in
the strict legal sense of the term, but are at least partially
attributable to income generated in this country. FFIs must deduct and
remit a thirty percent tax on any passthru payment to a nonparticipating
FFI or recalcitrant account holder. (55) This tax is meant to prevent
the use of participating FFIs as “blocker entities” to allow
nonparticipating FFIs and recalcitrant account holders to invest in U.S.
markets without complying with FATCA’s information reporting and
withholding requirements. (56)

As attorney David Moldenhauer explains, the passthru provision
means that “No avoid the reach of FATCA, a nonparticipating FFI
must avoid holding not only U.S. assets but also financial interests in
participating FFIs that hold U.S. financial assets or interests in other
participating FFIs.” (57) Developing a manageable way for FFIs to
determine when a payment is “attributable” to a withholdable
payment has. consumed a great deal of attention in the regulatory
process, however. (58) As a result, the Proposed Regulations issued by
the Treasury Department delay the activation of the passthru withholding
requirement until 2017. (59)

D. A Counterproductive Solution?

Although FATCA’s withholding requirements have attracted
significant media and regulatory attention, Treasury officials stress
that the law’s fundamental goal is collecting information about
overseas accounts owned by U.S. persons. (60) As such, FATCA’s
revenue impact is expected to be modest. The Joint Committee on Taxation
has estimated that collections under FATCA will total $8.714 billion
over ten years. (61)

Viewed in connection with other provisions of the Internal Revenue
Code (Code), though, FATCA’s revenue impact could be negative.
FATCA will generate immense compliance costs for U.S. withholding agents
and international financial institutions–costs that will likely be
deductible for U.S. tax purposes and may offset any increase in
collections attributable to increased reporting of overseas financial
assets. (62) FFIs must make costly investments to revolutionize their
due diligence procedures for locating U.S. account holders in order to
report information about those holders to the Service. They must also
develop systems to implement FATCA’s withholding requirements on
nonparticipating FFIs and recalcitrant account holders. FATCA’s
instruction to close accounts held by recalcitrant clients in banking
secrecy jurisdictions will further impact the financial results of many
FFIs.

The costs of implementing FATCA may be justified if the law
succeeds in creating a seamless global information-reporting network.
Some gaps in the legislation have already been identified, however. For
one, FATCA’s withholding “club” only has an effect on
investors active in U.S. capital markets. While the United States
remains a (perhaps the) premier location for finance, other countries
offer the potential for attractive investment returns. If tax dodgers
use undeclared bank accounts to make investments in non-U.S. markets,
they will largely be immune from FATCA disclosure and/or penalties
(assuming that their accounts are held in a nonparticipating FFI without
its own U.S. investments).

Two other gaps in FATCA have emerged in the initial analysis of the
statute. First, FATCA does not impose any passthru withholding
obligations on U.S. financial institutions. Scott Michel and H. David
Rosenbloom argue that this oversight may act like a “drain in the
bathtub” that will allow nonparticipating FFIs and recalcitrant
account holders to invest in the U.S. and avoid FATCA withholding. (63)
FATCA’s due diligence procedures for locating U.S. account holders
could also be gamed by individuals holding dual passports, which may
allow them to claim foreign status despite their liability for U.S. tax.
(64) Still, FATCA’s automatic reporting requirements and
withholding provisions present a formidable obstacle to individuals and
entities hoping to use overseas accounts for tax evasion purposes.

III. FATCA CONFLICTS: CASE STUDIES

FATCA has been described as “the most extensive
extraterritorial reach of U.S. tax enforcement in history.” (65)
Its information reporting and withholding requirements apply to all FFIs
with direct or indirect investments in U.S. markets, without adjustment
for variations in legal customs or banking practices. As noted in the
introduction, FATCA’s extraterritorial scope produces conflicts
with banking and data privacy laws in other countries. Failure to
resolve these conflicts could lead to the emergence of harmful gaps in
FATCA’s international reporting and enforcement network.

The potential for significant conflict-of-laws problems with FATCA
became evident soon after Congress passed the legislation. In comments
submitted to the Treasury Department after FATCA’s enactment, the
American Bar Association warned:

  FFIs and NFFEs may be constrained in their ability to
  identify and report U.S. account holders and U.S.
  investors by their local regulatory, privacy,
  information disclosure[,] or other legal restraints,
  some of which may impose criminal sanctions for
  the disclosure of information relating to persons
  that are investing in or doing business with the
  reporting entity. (66)

Commentators have suggested that in addition to posing compliance
problems for FFIs, FATCA could be viewed as a challenge to the
sovereignty of foreign countries over their own financial services
industries. (67) Michel and Rosenbloom summarize this viewpoint, writing
that “[i]t is thought that the United States has gone too far in
asking non-Americans to spend time and substantial sums to help the
United States enforce its own domestic law.” (68)

Financial industry participants affected by FATCA have echoed these
concerns. For example, in comments submitted to the Treasury Department,
the Australia and New Zealand Banking Group (ANZ Group) observed that
“FATCA will generate a number of potential conflicts” with
laws in the thirty-two jurisdictions in which the bank operates. (69)
The Group summarized the consequences of these conflicts for
multinational banks:

  The combined impact of these key conflicts of law
  challenges will potentially put banks with global
  operations in a position where they face either
  financial sanctions in the US for violating their
  FATCA FFI agreement (by complying with local laws),
  or legal sanctions in the local jurisdiction for
  complying with their FATCA FFI agreement. (70)

The Treasury Department has received similar comments from a wide
range of affected FFIs, underscoring the fact that conflict-of-laws
problems are not limited to financial institutions located in banking
secrecy or tax haven jurisdictions. Although FATCA provides a
“workaround” for some of these conflict issues, the remedies
it prescribes can be costly to administer and interfere with bank
operations. Additionally, the absence of current conflicts is no
guarantee that problems will not arise if the statute or its
accompanying regulations are amended in the future.

This Part will specify the kinds of conflicts that FATCA may
produce in four countries: Switzerland, the Cayman Islands, Japan, and
Mexico. While case studies of four countries cannot capture all of the
issues that may arise in implementing FATCA, they can highlight a few
major areas of conflict and help frame a discussion of potential
modifications to the law. Focusing on two banking secrecy
jurisdictions–Switzerland and the Cayman Islands–as well as two
leading U.S. trading partners–Japan and Mexico–provides a balanced
view of how FATCA will affect financial industry participants worldwide.

A. Switzerland: Resolvable Legal Conflicts, Unavoidable Economic
Conflicts

Switzerland is ground zero for the kind of tax evasion that FATCA
was designed to detect and prevent. The country is one of the
world’s largest financial centers, harboring $2.1 trillion in
offshore wealth, or twenty-seven percent of total assets invested
overseas. (71) As the UBS case and similar controversies have
illustrated, tax evaders can take advantage of Switzerland’s
banking secrecy laws to accumulate income in undeclared Swiss bank
accounts. Thus, if Swiss banks are not fully integrated into
FATCA’s information reporting network, U.S. authorities will lack
data on a significant number of accounts that pose a high risk of
facilitating tax avoidance.

Unsurprisingly, Switzerland’s privacy laws could complicate
efforts by Swiss banks to comply with FATCA. Under Article 47 of the
Swiss Federal Act on Banks and Savings Banks (72) and Article 43 of the
Federal Act on Stock Exchanges and Securities Trading, (73) Swiss
financial entities generally may not divulge client information to third
parties. Violations carry criminal penalties and significant fines. (74)
An exception to the prohibition on disclosure applies if bank account
information is needed in connection with a criminal proceeding. (75) Tax
evasion, however, is not regarded as a crime under Swiss law;
Switzerland recognizes an offense of tax fraud only “when documents
are forged or falsified, or when there is a scheme of lies to deceive
tax authorities.” (76)

Treaty agreements between the United States and Switzerland relax
the privacy protections afforded by Article 47 and Article 43 slightly.
Modifications to the double taxation convention between the two
countries made in 2009 (77) strengthen the information exchange
provision in Article 26 by providing that “[i]n no case shall … a
Contracting State … decline to supply information solely because the
information is held by a bank, other financial institution, nominee or
person acting in an agency or a fiduciary capacity …” (78) The
Technical Explanation accompanying the modifications indicates that this
provision “would effectively prevent a Contracting State from …
argu[ing] that its domestic bank secrecy laws … override its
obligation to provide information.” (79) Thus, whenever the United
States requests “such information as may be relevant … to the
administration or enforcement of the domestic [tax] laws,” Swiss
banks may not cite Articles 47 and 43 as reasons for withholding account
data. (80)

Yet other portions of the U.S.-Swiss treaty curtail the usefulness
of the agreement’s abrogation of banking secrecy protections. The
modified convention explicitly prohibits “fishing
expeditions”–blanket requests for large amounts of account data.
(81) Rather, the agreement requires a high degree of specificity in each
information exchange request. U.S. authorities must identify the
specific account holder under investigation and describe the specific
purpose for seeking that person’s bank account information, among
other requirements. (82) As the Technical Explanation indicates, these
treaty provisions “would not support a request in which a
Contracting State simply asked for information regarding all bank
accounts maintained by residents of that Contracting State in the other
Contracting State.” (83)

These provisions of Swiss banking and treaty law clearly prohibit
the automatic exchange of account information with foreign authorities.
Swiss FFIs that enter a FATCA agreement with the Service will expose
themselves to penalties if they disclose account data without permission
from the account holder, as such disclosure would violate Articles 43
and 47 and would not be authorized by any U.S.-Swiss treaty. Of course,
failure to report the information will place the same FFIs in violation
of FATCA, and subject to thirty percent withholding on a wide range of
U.S.-source income. (84)

In this kind of conflict-of-laws situation, FATCA instructs FFIs to
seek waivers of banking secrecy protections from affected account
holders. Swiss banking clients appear to have the right to waive
Articles 43 and 47, given the ostensible absence of any provision to the
contrary in Swiss law. Swiss banks also appear to have the power to
close accounts without the permission of the account holder–a step that
FATCA requires in the event that clients do not comply with waiver
requests. (85) Thus, FATCA’s waiver procedure should allow Swiss
banks to overcome the conflict between FATCA’s automatic reporting
requirement and Switzerland’s banking secrecy laws–and sidestep
treaty provisions that would otherwise limit bulk data exchange. But the
procedure involves its own burdens. Banks will have to devote resources
to requisitioning the necessary waivers and will lose revenues if they
are forced to close the accounts of nonresponsive clients.

Indeed, the main conflict FATCA generates with respect to
Switzerland may be economic, not legal. Swiss banking clients are
accustomed to having their financial information remain private and
nondisclosable to tax authorities. They may resist waiver overtures from
Swiss banks and elect to move their accounts to other jurisdictions. A
study by Booz & Company indicates that Swiss banks experienced this
“account flight” after the initiation of new withholding tax
agreements with the United Kingdom and Germany. (86) Booz estimated that
the agreements would lead Swiss banks to lose CHF 47 billion in
financial assets under management, leading to a CHF 1.1 billion decline
in banking revenues. (87) FATCA may accelerate account flight and
jeopardize a significant sector of the Swiss economy in the process.
(88) In fact, the chief of Switzerland’s financial market regulator
has openly questioned whether the Swiss financial industry can continue
to be a market leader given the pressure to share tax data. (89) U.S.
policymakers may need to consider whether the economic interference
FATCA could generate is efficient or warranted by the scale of the
problem that the statute is intended to address.

B. Cayman Islands: Problematic Legal Precedent?

Like Switzerland, the Cayman Islands has a reputation for
facilitating tax avoidance. The Caribbean nation’s low tax rates
have made it a haven for foreign corporations–particularly hedge funds
and insurers–looking to shelter income in overseas subsidiaries. (90)
Cayman banking secrecy laws have also nurtured a large private wealth
management sector. Data collected by the Bank of International
Settlements indicate that U.S. individuals and NFFEs hold at least $290
billion in Cayman bank accounts. (91) Estimates suggest that the vast
majority of these accounts are not reported to U.S. tax authorities.
(92) As with Switzerland, the Cayman Islands’ prominence in
international finance and tax evasion make the implementation of FATCA
in the country a U.S. priority.

Bank account privacy in the Cayman Islands is governed by the 1976
Confidential Relationships (Preservation) Law (Confidential
Relationships Law), (93) which prohibits the disclosure of “all
confidential information with respect to business of a professional
nature which arises in or is brought into the Islands.” (94)
Exceptions apply, most of which allow banks to divulge information for
local law enforcement purposes. (95) In 2009, the Cayman government
added a significant new exception when it amended the Confidential
Relationships Law to cross-reference the country’s Tax Information
Authority Law. (96) As the Tax Information Authority Law is a
compilation of all Cayman TIEAs, the amendment removed all obstacles to
disclosure of account information requested under the terms of
information exchange treaties. (97)

Like the U.S.-Swiss tax convention, though, the U.S.-Cayman TIEA
does not provide for the automatic exchange of information; tax
authorities must make specific requests for information. (98) As a
result. Cayman banks will most likely need to rely on FATCA’s
waiver procedure to comply with their reporting obligations as
participating FFIs. The Confidential Relationships Law allows account
holders to waive its protections at any time, which should facilitate
FATCA compliance. (99) Cayman banks have signaled that they are prepared
to involuntarily close the accounts of clients that do not respond to
waiver requests. (100)

In the past, however, Cayman courts have been reluctant to permit
disclosure of financial information when waivers of the Confidential
Relationships Law were obtained under duress. These decisions involved
“compelled waivers,” a device used in U.S. tax evasion
investigations that “circumven[t] the policy of confidentiality by
coercing the customer to waive secrecy protections extended by the
foreign jurisdiction.” (101) Characterizing the consent granted
under these waivers as “merely submission to force,” the
Cayman Grand Court ruled in In re An Application by ABC, Ltd. that
compelled disclosure authorizations do not have effect under Cayman law.
(102) Under ABC Ltd, Cayman banks do not have protection from legal
liability for violations of the Confidential Relationships Law if they
share information with tax authorities pursuant to a compelled waiver.

The lack of an accessible database of Cayman legal decisions makes
it difficult to evaluate whether the ABC, Ltd. decision remains current
law (although a review of secondary sources provides no indication to
the contrary). The existence of the case, and the legal reasoning it
represents, raises the possibility that Cayman courts could refuse to
give effect to waivers sought under FATCA. This would require the courts
to find that the threat of involuntary withholding and/or account
closure constitutes improper coercion to waive Cayman banking secrecy
protections.

While such a finding is cognizable, it seems somewhat unlikely
given the recent trend toward cooperation between U.S. and Cayman tax
authorities, evidenced by the 2003 TIEA referenced above. Additionally,
there is some suggestion in the ABC, Ltd. case that the court considered
the availability of penal sanctions for failure to provide a waiver as
an important consideration in evaluating whether the use of force was
excessive. (103) Account holders that do not provide a waiver under
FATCA are subject only to economic sanctions, which a court may (with
good reason) view as less severe than imprisonment.

Assuming the ABC, Ltd. case does not lead individuals and financial
institutions to challenge the validity of the waiver procedure, the use
of FATCA’s workaround to facilitate Cayman implementation of FATCA
could lead to capital outflows from the country as investors move their
funds to more “secure” jurisdictions. FATCA’s effect on
the Cayman economy will likely be tempered, however, by the fact that
the country’s principal attraction for tax planners is its low tax
rates. (104) The Cayman financial sector mostly caters to financial
institutions and corporations, in contrast to Switzerland, where private
wealth management services for individuals are a relatively more
important business. (105) Perhaps for this reason, Cayman legal and tax
professionals have not expressed too much concern about the consequences
that implementation of FATCA may bring. (106)

C. Japan: Reluctance to Modify: Legal Customs

Despite Japan’s status as a major U.S. trading partner, the
country’s financial services industry has been a vocal critic of
FATCA. Japanese bankers have submitted a number of detailed comment
letters about the legislation to the Treasury Department, one of which
warns that FATCA may “result in substantial confusion in the
industry and could ultimately lead Japanese financial institutions to
withdraw their investment from U.S. financial assets.” (107)
Japanese concern over FATCA reflects Forbes contributor Dan
Mitchell’s observation that FATCA is “causing headaches and
anger even in nations with high taxes and weak protection of client
data”–not just tax haven jurisdictions like Switzerland and the
Cayman Islands. (108)

Japan adopted an analog of privacy laws in Switzerland and the
Cayman Islands when the Diet approved the Personal Information
Protection Act (PIPA) in 2005. (109) The PIPA applies to all Japanese
entities that handle personal data about a living
individual–Idatajwhich can identify the specific individual by name,
date of birth or other description contained in such in formation
(including such information as will … enable the identification of the
specific individual).” (110) In general, entities that have access
to personal information may not share it with third parties. (111)
Although the PIPA is subject to broader exceptions than either the Swiss
or Cayman law, the Japanese Bankers Association (JBA) has stated that
provision of account information to the Service under FATCA may violate
the Act. Failure to comply with the PIPA or related corrective orders
may result in a JPY 300,000 fine per disclosure. (112)

The JBA has expressed skepticism that FATCA’s waiver procedure
could help banks avoid PIPA problems. As noted above, a component of the
waiver workaround is that participating FFIs must close the accounts of
clients who do not comply with waiver requests. The JBA worries that
these account closures could be difficult to achieve or unduly
disruptive:

  [W]e need to be "extremely careful" when executing involuntary
  termination of accounts, because deposit accounts are deeply rooted
  in the daily lives of the Japanese people and are part of essential
  settlement infrastructure in Japan. Under both business customs and
  under the contractual terms currently in effect, involuntary
  termination of accounts is supposed to be permissible only when such
  accounts are known to be used for illegal activities. (113)

FATCA does not presuppose that all of the accounts it covers are
being used for “illegal activities”–the law applies to any
financial account maintained by or on behalf of a U.S. person. As a
result, Japanese banks may be reluctant to comply with FATCA’s
account closure requirement for non-waiving clients. Even if a Japanese
bank imposed penalty withholding against these recalcitrant clients, it
would be in violation of its agreement with the Service and would itself
be subject to withholding on the U.S.-origin payments identified in
FATCA. Of course, on the flip side, fully complying with FATCA and
involuntarily closing accounts could leave a bank liable for sanctions
under Japanese law. Neither of these options seems particularly
efficient or fair to financial institutions and their clients.

While amending Japanese law and banking regulations could help
avoid conflicts with FATCA’s withholding procedure, the JBA has
suggested that amendments may not be feasible. “Without public
support for FATCA,” the association wrote in comments submitted to
the Treasury Department, “amending deposit terms and conditions may
not likely be accepted by the public at large and would likely lead to a
social problem.” (114) The JBA may have an interest in exaggerating
the difficulty of making (relatively minor) changes to banking laws and
the scope of the “social problem” that these modifications
could produce. It is probably true, however, that amending Japanese law
to enable compliance with FATCA would not be without some controversy,
as the amendments would help the United States use Japanese financial
institutions to further its own domestic revenue needs.

D. Mexico: Legal Impediments to Implementation

Mexican financial institutions face significant restrictions on
their ability to comply with FATCA’s reporting, withholding, and
account closure requirements. First, Article 117 of Mexico’s Credit
Institutions Law (115) protects the privacy of financial data, like the
Swiss and Cayman laws described above. As attorneys from a leading
Mexico City law firm explain. Article 117 provides that “credit
institutions cannot give in any case news or information concerning
deposits … except to the depositor, debtor, account holder,
beneficiary, … commercial legal principals, their legal
representatives, or persons holding sufficient authorization in order to
… dispose of the account.” (116) Exceptions to Article 117 allow
financial institutions to disclose client information in connection with
legal proceedings to which the account holder is a party, or to various
divisions of the Mexican government. (117) In comments submitted to the
Treasury Department, the Mexican Banking Association (MBA) and Mexican
Securities Industry Association (MSIA) express the view that because
Article 117 “provide[s] specific exceptions to the general duty of
confidentiality, there is a concern that the lists of specific
exceptions are intended to be exclusive.” (118) Since no exception
authorizes the transfer of information to foreign tax authorities,
Mexican FFIs may face penalties for providing information to the Service
unless their account holders waive their Article 117 privacy
protections.

Assuming that U.S. clients of Mexican financial institutions are
willing to waive Article 117, the workaround procedure should allow
Mexican Ms to fulfill their duties under FATCA. However, the MBA and
MSIA have raised concerns about the involuntary account closure
requirement for non-waiving account holders. Under Mexican law, FFIs
cannot forcibly close out equity interests in investment funds. (119)
Mexican broker-dealers are also limited in their ability to close
certain investment accounts if doing so would require a sale of
securities. (120) While similar restrictions do not apply to standard
checking and savings accounts, the prohibition on involuntary closures
for certain accounts could place some Mexican financial institutions in
the position of choosing whether to comply with domestic banking laws or
to follow FATCA.

Unlike their counterparts in Switzerland, the Cayman Islands, and
Japan, the Mexican financial industry has also indicated that it may
have difficulty complying with FATCA’s various withholding
provisions. As described in Part LC, FATCA requires that participating
FFIs withhold a thirty percent tax on payments to their own recalcitrant
account holders and on passthru payments to nonparticipating FFIs and
NFFEs. Article 113(b) of the Mexican Credit Institutions Law, however,
provides that “whoever uses, obtains, transfers, or in any form
disposes of the funds or assets of the clients of credit
institutions” may be subject to significant penal and financial
penalties, unless the account holder grants permission. (121) The MBA
and MSIA have suggested that the withholding instructed by FATCA would
qualify as an impermissible “disposition” of funds. (122) As a
result. Article 113(b) may bar Mexican financial institutions from
fulfilling FATCA’s withholding requirements and place them in
violation of their FFI agreements with the Service, thereby subjecting
them to a thirty percent tax on their own U.S. source payments.

Mexican FFIs could avoid compliance issues with Article 113(b) by
amending their client agreements to provide for involuntary withholding,
but it may be difficult to rewrite these agreements before FATCA goes
into effect. Clients may also object to having their Mexican account
agreements altered to comply with U.S. laws (although their objections
should be tempered by the fact that alterations will only be necessary
for accounts owned by U.S. persons, who should not be surprised by their
obligation to comply with U.S. laws).

IV. RESOLVING CONFLICTS: MULTILATERAL COOERATION

The case studies presented above confirm that some of FATCA’s
provisions will conflict with foreign banking and privacy laws. Although
an analysis of four countries cannot capture the full range of conflicts
that may emerge as FATCA goes into effect, the general issues identified
in Switzerland, the Cayman Islands, Japan, and Mexico have been observed
by financial institutions and banking regulators in other countries.
(123) Broadly speaking, these potential conflict-of-laws problems can be
sorted into three categories:

CONFLICTS WITH FOREIGN PRIVACY LAWS. Concerns about the
digitization of personal records and identity theft have led many
countries to adopt laws that limit the sharing of client information by
commercial entities. While these laws have exceptions that permit
disclosure in some instances, the exceptions do not appear to be broad
enough to permit the transfer of information to a foreign government as
required by FATCA. Requesting waivers of privacy laws for the purposes
of FATCA compliance is not an ideal solution for several reasons. First,
solicitation of waivers will add to the compliance burden on FFIs.
Furthermore, if clients do not waive privacy protections, FFIs will face
economic sanctions in the form of lost revenues, as FATCA requires the
closure of nonwaiving accounts. As the JBA observed, involuntary account
closures may also create resentment and “unrest” among account
holders. Although FATCA is only intended to affect accounts with indicia
of U.S. ownership, errors in residency determinations could result in
foreign citizens having their accounts closed even though they have no
U.S. tax exposure. Finally, involuntary closures may be prohibited by
local law in some countries. If FFIs fail to close accounts due to
domestic legal prohibitions, they will not be able to participate in the
FATCA program and will be subject to the thirty percent penalty
withholding tax on their U.S.-source payments.

CONFLICTS WITH FOREIGN BANKING LAWS. As illustrated by the case
study of Mexico, foreign laws and regulations governing the handling of
consumer bank accounts could prevent compliance with FATCA. For example,
while FFIs often have the authority to withhold payments from customer
accounts for purposes of satisfying domestic tax obligations, they may
lack similar authority with respect to tax obligations owed to another
country. FFIs may not have the power to take other actions demanded by
FATCA, such as closing accounts without the permission of the account
holder. FATCA is uncompromising in its penalty for even minor deviations
from the statute: if an FFI does not satisfy any aspect of its agreement
with the Service, penalty withholding will apply on all U.S.-source
payments made to that institution.

CONFLICTS WITH FOREIGN BANKING POLICIES & PRACTICES. Even where
FATCA does not create an unavoidable legal conflict, the statute
challenges other countries’ conceptions of the role of the banking
sector and of the appropriate relationship between account holders and
their financial institutions. Put simply, FATCA demands total disclosure
and transparency in financial relationships, whereas policies in other
countries may favor privacy and discretion. While there are good reasons
for FATCA’s approach, U.S. policymakers seem unwilling to recognize
that there may also be justifications for the banking practices followed
by other countries–justifications that go beyond the facilitation of
tax evasion. The macro policy conflict between FATCA and banking laws in
some counties is significant, because the U.S. law could create economic
disruptions in countries with large private banking sectors. The case
study of Switzerland presents some data on the magnitude of the economic
loss that that country sustained as a result of the adoption of an
anonymous withholding tax for payments within the European Union; the
magnitude of losses related to FATCA may be even greater. The Swiss
experience indicates that conflicts with FATCA may range beyond the
technical and procedural to reach fundamental issues about financial
privacy and economic competitiveness.

Why do these conflicts matter? After all, from a U.S. standpoint,
if an FFI is unable to uphold its agreement to the Service or if an
account holder refuses to provide a waiver of privacy protections, the
Treasury will simply collect the thirty percent withholding tax imposed
on payments to nonparticipating FFIs and recalcitrant account holders.
These collections could match–or perhaps even exceed–what the United
States could collect if all global financial institutions observed the
letter of the FATCA statute.

Behind the letter of FATCA’s text is its spirit,
however–those who evade U.S. taxation should be identified, brought to
justice, and prevented from repeating such evasion in the future. As
Assistant Treasury Secretary Emily McMahon has said, FATCA’s main
purpose is to ensure the accurate reporting of income, not to raise
additional revenue. (124) If legal conflicts make it impossible for FFIs
to enter FATCA agreements with the Service, U.S. persons will still be
able to accumulate unreported income in accounts at nonparticipating
institutions, albeit with the subtraction of the thirty percent
withholding tax. This withholding tax may be cheap compared to the
alternatives. The Code provides harsh penalties for U.S. persons who
“willfully attemp[t] … to evade or defeat” any U.S. tax: a
prison term of up to five years, a $100,000 fine ($500,000 for
corporations), or both. (125) Similar penalties apply to the individuals
and entities that facilitate tax avoidance. (126) Tax evaders may
conclude that the risk of suffering such penalties is well worth the
withholding tax cost of maintaining accounts at nonparticipating FFIs.
This choice would generate some additional revenue for the Treasury, but
at the cost of revealing the identities of tax evaders.

Foreign legal conflicts with FATCA may impact the U.S. Treasury in
more indirect ways by making it more difficult for Americans to conduct
financial activities overseas and by discouraging international
investment in the U.S. economy. Some foreign financial firms have
already concluded that the easiest way to avoid conflicts with FATCA is
to drop all of their U.S. account holders. (127) Banks without U.S.
account holders have no information to report to the U.S. under FATCA
and no withholding or administrative responsibilities–they can conduct
“business as usual.” In a globalized economy, however, limited
access to financial accounts overseas places U.S. individuals and
businesses at a distinct competitive disadvantage.

For FFIs that are unable to comply with FATCA due to legal
conflicts, the prospect of a thirty percent withholding tax on
U.S.-source investments may lead financial institutions to direct their
capital elsewhere. As noted above, even if an FFI is entitled to a
refund of part or all of the tax under a treaty, the procedure for
requesting such a refund is cumbersome. (128) It would be cheaper and
easier for nonparticipating FFIs to invest in other countries.

FFIs that elect to shift their investments away from the U.S. would
present attractive places for U.S. persons to stash undeclared income,
as FFIs without American investments lack a “hook” for the
U.S. to demand information reporting under FATCA. Thus, legal conflicts
could produce a vicious cycle of discouraging investment in the U.S.
while presenting U.S. persons with a new avenue to avoid U.S. taxation.
(129) Even if U.S. authorities view the loss of some inbound investment
activity as an acceptable cost of increased disclosure (a highly
debatable argument at a time of economic stagnation), the opportunities
for further evasion posed by nonparticipating FFIs without U.S.
investments could undermine the FATCA regime entirely.

Finally, legal conflicts with FATCA underscore that the law will
infringe upon the sovereignty of foreign countries. As J.C. Sharman
explains, “sovereignty not only involve[s]a right to be free from
outside interference, but also an accompanying duty to refrain from
undermining the laws of other sovereign states.” (130) In its
current form, FATCA will actively undermine policy decisions that other
countries have made about their domestic banking, data privacy, and tax
administration regimes. This interference is especially unfair because
the United States did not offer a sufficient opportunity for foreign
countries to voice opinions about FATCA before Congress enacted it.
(131) FATCA’s infringement on sovereignty may foster resentment
through the appearance that the United States is attempting to impose
upon other countries, which in turn may undermine international
cooperation to address tax evasion. Indeed, Sharman suggests that
sovereignty concerns were at least partially responsible for derailing
portions of the Organization for Economic Cooperation and
Development’s Harmful Tax Competition project in the late 1990s and
early 2000s. (132)

Legal conflicts with FATCA–and their attendant problems–could be
mitigated by adjusting the law to take the perspectives of foreign
governments into account. There are two ways to do this. First, U.S.
policymakers could make unilateral changes to the FATCA statute.
Alternatively, they could integrate FATCA into a multilateral
coordination initiative. While the first option would probably be
simpler to execute, the second offers greater benefits. Tax evasion is a
problem that demands a multilateral response. It affects revenue
authorities worldwide and, as Sharman points out, “[a]lmost every
country in the world can be used to avoid or evade another
country’s taxation.” (133) Only by working together can
countries address the issues raised by the complex interactions between
global tax laws and financial systems. Collaboration with other
countries could help close gaps in FATCA’s reporting regime and
reverse disincentives to invest in the United States. It would also
remove the taint of unilateral action that might otherwise color the
international community’s view of FATCA.

U.S. officials have signaled that they are open to integrating
FATCA within a multilateral initiative to combat tax evasion. (134) The
question, then, is the specific form that this cooperation should take.
This paper will evaluate three proposals currently on the table, on the
premise that it is more realistic to expect progress via programs that
have already been introduced. The strategies developed by the United
States, the Swiss banking community, and the European Union are also
representative of leading approaches to promote multilateral action
against tax evasion that have appeared in the academic literature. The
Parts that follow will describe each proposal and assess its potential
to address the conflict-of-laws problems described elsewhere in this
paper.

A. Treasury Approach: Intergovernmental Wormation Sharing

The Treasury Department hopes to facilitate FATCA implementation by
striking bilateral or multilateral agreements to overcome specific
conflict-of-laws problems. (135) The first of these agreements took
shape on February 8, 2012, when the governments of the United States,
France, Germany, Italy, Spain, and the United Kingdom announced their
intention to work together “to intensify their co-operation in
combating international tax evasion.” (136) The Joint Statement
issued by these countries concedes that legal conflicts represent a
major roadblock to FATCA compliance. (137) It proposes an
intergovernmental information-sharing network to “address … legal
impediments to compliance, simplify practical implementation, and reduce
FFI costs.” (138)

The Joint Statement approach would relieve FFIs in participating
countries from the obligation to enter an agreement with the Service.
(139) As indicated in Part I.B, these agreements are the root source of
the legal conflicts with FATCA. Without them, compliance problems drop
away. FFIs would not be required to report information about their
account holders to U.S. tax authorities and would not have to go through
the waiver procedure to avoid violations of foreign financial privacy
laws. (140) FFIs would have no obligation to terminate the accounts of
clients who did not waive their data privacy protections, or to impose
withholding–passthru or otherwise–on payments to account holders.
(141)

In the place of FATCA agreements with FFIs, participating countries
would agree to change their domestic laws to permit intergovernmental
information reporting. Rather than reporting information about U.S.
account holders directly to the Service, FFIs would report the data to
the government of the country in which they operate. (142) That
government would in turn send the information to the Service. (143) The
United States would reciprocate by enacting similar legislation covering
financial institutions within its jurisdiction, and sharing information
on foreign holders of U.S. accounts with participating governments.
(144) Although this approach would remove the possibility of any FATCA
withholding tax collections from accounts in participating countries,
the Joint Statement reaffirms that “the policy objective of FATCA
is to achieve reporting, not to collect withholding tax.” (145)

The Joint Statement approach received an enthusiastic response from
financial institutions and governments worried about the legal conflicts
posed by FATCA. (146) In the weeks since it was unveiled, a number of
countries have expressed their hope to enter into similar agreements
with the U.S. government, including the Isle of Man and Luxembourg, two
countries with a reputation for facilitating tax avoidance. (147) To
date, the Treasury Department has reached definitive agreements with the
governments of the United Kingdom, Denmark, and Mexico.

Additionally, the Treasury has announced that it will work with the
governments of Switzerland and Japan to facilitate FATCA compliance
through a modification of the Joint Statement approach. (148) Under this
so-called “Model II” approach, the Swiss and Japanese
governments will modify their domestic laws to allow FFIs to exchange
information directly with the IRS. In exchange, the U.S. will grant the
compliance concessions described above with respect to the renamed
“Model I” approach. (149)

Although details about the execution of the Model I and Model II
approaches remain to be seen, the initial sketches that the Treasury has
presented would seem to overcome conflict-of-laws issues while
preserving the sovereignty of foreign countries. Treaties implementing
the Models could be flexible enough to address a range of legal
conflicts, including those discussed in this paper.

However, this flexibility will come at a cost, both in the form of
the time it may take to reach agreements with other countries and the
inconsistencies that piecemeal bilateral or multilateral treaties may
produce. It may take years for the United States to marshal the
diplomatic and political resources necessary to reach agreements
implementing the Joint Statement with countries harboring major
financial centers, to say nothing of the broader international
community. In the meantime, the problems caused by legal conflicts with
FATCA will fester.

Furthermore, if U.S. policymakers decide to focus treaty-making
efforts on “systematically important” counties (leaving
“standard” FATCA to apply to other countries), the resulting
two-tier system may create opportunities for aggressive tax planning and
manipulation. In countries without an intergovernmental
information-exchange agreement with the United States, conflicts may
continue to prevent financial institutions from participating in FATCA.
Thus, the identities of tax evaders with accounts located in these
countries will remain undisclosed. Financial institutions in countries
where “standard” FATCA applies will also continue to
experience incentives to stop doing business with U.S. individuals and
businesses and to decrease their investments in the U.S. market.

Finally, some financial institutions have suggested that the Joint
Statement approach could create additional compliance burdens for banks,
as the individual treaties implementing intergovernmental information
sharing may vary. (150) The recent emergence of the “Model II”
variation on the original Joint Statement approach lends support to this
argument. Banks that operate across multiple jurisdictions, like the ANZ
Group, will have to assess their obligations under every country’s
version of the treaty implementing the Joint Statement.

B. Switzerland’s RUBIK: Enshrining Banking Secrecy

The curiously named RUBIK project represents Switzerland’s
effort to preserve the banking secrecy protections enshrined in Articles
43 and 47. As foreign data privacy laws are the source of some of the
major conflicts with FATCA, U.S. adoption of a RUBIK-type mechanism
could alleviate some compliance problems for FFIs.

Like the Joint Statement approach, RUBIK relies on bilateral
agreements to reconcile discrepancies between Swiss and foreign laws.
Since 2009, Swiss authorities have concluded RUBIK implementation
treaties with Austria, Germany, and the United Kingdom. 151 These
agreements provide for the following:

* Switzerland will direct banks within its jurisdiction to
determine which of their account holders are residents of the
contracting states.

* Affected non-resident account holders will have the choice
between:

(1) Paying a tax of between fifteen and thirty-eight percent on the
gross account value to the government of their country of residence, or

(2) Disclosing the existence of their accounts to the residence
country.

* Regardless of which option the account holder chooses, Swiss
banks will be required to withhold a twenty-five percent tax on future
investment income earned by account holders in Switzerland; this tax
will be remitted to the residence country government. (152)

RUBIK-style agreements could smooth out FATCA compliance issues for
FFIs in banking secrecy jurisdictions, as financial institutions would
not have to seek waivers from their clients to transfer information to
U.S. authorities. They could also provide an alternative path to
compliance for financial institutions in countries like Mexico, where
general banking regulations conflict with FATCA. RUBIK’s tolerance
of anonymity, however, is entirely at odds with FATCA’s goal to
collect as much information as possible about foreign account holders.
Implementing RUBIK on a large-scale basis would allow tax cheats to
continue accumulating undeclared income overseas.

For this reason, the RUBIK project has been the subject of heavy
criticism. In a colorful critique of his country’s agreement, a
representative of the Austrian Green Party asked: “How can it be
that a cheat can buy amnesty by returning part of their illicit
booty?” (153) The E.U. Commission has also voiced its concern that
RUBIK agreements may undermine anti-evasion efforts. (154) Although the
Joint Statement approach would also tolerate anonymity in
“standard” FATCA jurisdictions where conflicts prevent full
compliance, RUBIK represents a much more brazen attempt to enshrine
banking secrecy protections in the global financial system.

RUBIK’s heritage as a concept developed by a banking secrecy
jurisdiction offers some advantages, however. Multilateral efforts to
combat tax evasion must engage the governments of the countries that
enable such evasion currently–both out of respect for the sovereignty
of such countries and because a “solution” that did not
involve them would be incomplete. Switzerland’s acceptance of a
regulatory mechanism that imposes significant taxes on evaders and
presents them with an opportunity to identify themselves to their
residence county is an indication that a similar proposal would be
tolerated by other secrecy jurisdictions. As such, it may help set a
baseline for negotiations about agreements that may be more rigorous
than RUBIK but incorporate some aspects of the Swiss proposal.

C. E. U. Savings Directive: Striking a Compromise?

Some tax policy experts have suggested that legal conflicts with
FATCA can be reduced by modifying the law to resemble the 2003 European
Union Savings Directive. (155) Like FATCA, the EUSD aims to curb revenue
losses due to the use of undeclared accounts and investment interests.
(156) The directive instructs E.U. member states to develop procedures
for financial institutions to verify the identity and residency status
of the beneficial owners of interest payments. (157) The “paying
agent” (158) of a particular interest payment must use this
information to report the payment to the government of the member state
in which the agent is located. (159) That government must then exchange
the information with the beneficial owners’ country of residence.
(160) As the preamble to the Directive states, “the automatic
exchange of information between Member States … makes possible the
effective taxation of … payments in the beneficial owner’s Member
State of residence.” (161)

The European Commission received pushback during the development of
the EUSD from member states Austria. Belgium, and Luxembourg, which were
reluctant to change their banking privacy laws to authorize automatic
information sharing. (162) The European Union was also sensitive to the
possibility that an uncompromising Directive could cause capital to
shift to nearby nonmember secrecy jurisdictions like Switzerland,
Andorra, and Monaco. As a result, the EUSD features a special
“transitional” (163) regime initially applicable to Austria,
Belgium, and Luxembourg (Belgium recently opted to follow the normal
EUSD procedure). Rather than reporting identity information about
payment recipients, paying agents located in these countries must levy a
withholding tax on cross-border payments and remit a portion of it to
the beneficial owner’s country of evidence without revealing any
information about the owner’s identity. (164) Observers have
written that the “transitional” regime creates an “uneasy
truce between information reporting and anonymous withholding models for
tax administrative assistance.” (165)

The EUSD avoids the conflict-of-laws problems posed by FATCA.
Rather than issuing inflexible mandates to E.U. member countries, it
invites governments to make modifications to their domestic laws to
enable compliance with the broader scheme. The EUSD did not take effect
until these modifications had been completed in all member countries, so
financial institutions would not face sanctions by virtue of being
located in a (temporarily) noncompliant state. (166) As a result of the
EUSD’s cooperative implementation approach, the initiative did not
conflict with banking laws and regulations in member states when it took
effect.

Of course, part of the reason why the EUSD has not produced major
legal conflicts is that it tolerates the persistence of banking secrecy
laws, but the EUSD’s approach to secrecy jurisdictions is more
reasonable than the one taken by FATCA, the Joint Statement, or RUBIK.
Rather than subjecting FFIs in these countries to daunting compliance
burdens (as FATCA and the Joint Statement approach would in countries
that did not agree to implement some form of automatic information
sharing), the EUSD imposes a single withholding tax that is much easier
to administer than the one contemplated by FATCA. Notably, the EUSD
lacks a “passthru” payment provision–the source of much
compliance consternation with FATCA. FFIs would also be free from the
burdens of the workaround procedure and the possibility that
“compelled waiver” prohibitions or other legal restrictions
could jeopardize the feasibility of that path to compliance. At the same
time, the EUSD does not issue a carte blanche for banking secrecy
jurisdictions to harbor tax evaders forever, as contemplated by the
RUBIK proposal. Rather, the EUSD contemplates the eventual end of
banking secrecy when EUSD-participant countries will not stand at a
competitive disadvantage for discontinuing it.

As the EUSD affects transactions in several countries, it does not
create incentives for financial institutions to avoid economic
interactions with individuals and businesses in any one state.
Furthermore, the European Union avoided infringements on national
sovereignty by involving all member-state governments in the development
of the EUSD and allowing them to make their own legal and regulatory
changes to facilitate the Directive’s reporting program. As noted
above, their participation in preparing the EUSD also helped prevent
conflicts with general banking laws and regulations.

The EUSD model’s ability to resolve legal conflicts while
accommodating the sovereignty of affected countries (banking secrecy
jurisdictions and others alike) make it the best option for implementing
FATCA without the disruptions that the current version of the law would
cause. Modifying FATCA to integrate it into a “Worldwide Tax
Directive” regime would entail the following steps:

* Immediate delay of FATCA’s implementation date.

* Removal of FATCA’s sanctions for non-participating FFIs,
recalcitrant account holders, and nonwaiving account holders–including
the passthru payment mechanism. These provisions would be replaced by
the withholding tax described in Article 11 of the EUSD, which instructs
paying agents in states that do not wish to implement automatic exchange
of information provisions to deduct a thirty-five percent tax from
payments to nonresident account holders. A portion of this tax would be
remitted–anonymously–to the account holder’s country of
residence.

* Negotiation with foreign governments, perhaps through an
intergovernmental organization like the UN, OECD, or WTO, to develop
standards for intergovernmental information exchange along the lines of
what is described in Articles 8 and 9 of the EUSD and in FATCA at
section 1471(b). Ideally, the United States will be able to reach a
multilateral agreement with a large group of countries.

* Establishment of a “cut-off’ date by which countries
must modify their domestic laws to avoid conflicts with the Worldwide
Tax Directive. Countries that have not changed their laws by that date
will be subject to the Article II withholding tax as an alternative.

* Further negotiation with banking-secrecy jurisdictions and other
countries electing to implement Article 11 withholding to reach an
agreement on a sunset date for banking secrecy protections. If countries
unite with the United States in adopting the Worldwide Tax Directive and
confront these jurisdictions as a group, the hope is that they will
agree to dismantle banking-secrecy protections en masse because they
would no longer stand at an economic disadvantage vis-a-vis each other
for doing so.

The process of suspending FATCA implementation and pursuing an
alternate, worldwide model based on the EUSD would certainly take some
time (far longer than the apparently short time it took to develop and
pass FATCA!). It may be better, however, to devote time and resources to
a comprehensive solution than to pursue a flawed one in the short term.
By avoiding legal conflicts and engaging other countries in a
multilateral dialogue about tax evasion, the EUSD approach would correct
many of the problems associated with FATCA and would be well worth the
extra effort to develop and implement it.

V. CONCLUSION

In her remarks to the New York State Bar Association, Assistant
Secretary McMahon said: “Ultimately, we believe that our efforts to
implement FATCA and to resolve the challenges it poses can and should
advance the important work already begun … to develop multilateral,
global approaches to the exchange of financial account
information.” (167) This paper has sketched one way to achieve that
goal. Ultimately, efforts to improve the reporting of income held
overseas must share the same, multilateral spirit of the G20’s
proclamation to end the era of banking secrecy. FATCA will only succeed
in achieving its goals if the United States works with other countries
to develop a coordinated response to tax evasion.

(1.) Group of Twenty [G20], London Summit Communique: Global Plan
for Recovery and Reform (Apr. 2, 2009), available at
http://www.state.gov/e/eb/ecosum/pittsburgh2009/resources/165077.htm.

(2.) FATCA was enacted as Title V of the Hiring Incentives to
Restore Employment Act, Pub. L. No. 111-147, [section][section] 501
-562, 124 Stat. 71, 97-118 (2010) (codified as amended in scattered
sections of I.R.C.).

(3.) JANE G. GRAVELLE, CONG. RESEARCH SERV., R40623, TAX HAVENS:
INTERNATIONAL TAX AVOIDANCE AND EVASION 22 (2010).

(4.) See Reuven S. Avi-Yonah, The OECD Harmful Tax Competition
Report: A Retrospective After a Decade, 34 BROOK. J. INT’ L L. 783,
793 (2009).

(5.) See id

(6.) See Press Release, U.S. Cong., Baucus, Rangel, Kerry, Neal
Improve Plan to Tackle Offshore Tax Abuse Through Increased
Transparency, Enhanced Reporting and Stronger Penalties (Oct. 27, 2009)
[hereinafter Baucus-Rangel Press Release].

(7.) See Itai Grinberg, Beyond FATCA: An Evolutionary Moment for
the International Tax System 7-8 (Jan. 27, 2012) (unpublished
manuscript), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1996752; J. Richard
Harvey, Jr., Offshore Accounts: Insider’s Summary of FA TCA and Its
Potential Future 6-9 (Villanova U. Sch. of Law Pub. Law & Legal
Theory Working Paper Series, Paper No. 2011-24, 2011), available at
http://papers.ssm.com/sol3/papers.cfm?abstract_id=1969123; see also
Scott D. Michel & H. David Rosenbloom, FATCA and Foreign Bank
Accounts: Has the U.S. Overreached?, 62 TAX NOTES INT’L 709 (May
30, 2011). While other tax evasion scandals unfolded in the same time
period, the UBS affair attracted the most attention in the United
States.

(8.) See Beckett G. Cantley, The UBS Case: The U.S. Attack on Swiss
Banking Sovereignty, 7 BYU INT’L L. & MGMT. REV. 1, 19-20
(2011); Michael G. Pfeifer & Oluyemi Ojutiku, An Overview of the
Foreign Account Tax Compliance, A.B.A. SEC. REAL PROP., TRUST &
ESTATE L., Apr. 28, 2011, at 2, available at
http://www.capdale.com/files/4106_An%200verview%20of%20the%20Foreign%20Account%20Tax%20Compliance%20Act.pdf.

(9.) See I.R.C. [section][section] 871(i)(2)(A), 881(d), 871(h),
881(c); GRAVELLE, supra note 3, at 20. As used in this paper, the term
“U.S. person” has the meaning indicated in I.R.C. [section]
7701(a)(30).

(10.) STAFF OF JOINT COMM. ON TAXATION, 11 1T11 CONG., JCX-23-09,
TAX COMPLIANCE AND ENFORCEMENT ISSUES WITH RESPECT TO OFFSHORE ACCOUNTS
AND ENTITIES 18 (2009), available at
http://www.jet.gov/publications.html?fune=startdown&id=3520.

(11.) Id. at 18.

(12.) Mat 19.

(13.) United States Model Income Tax Convention art. 26, Nov. 15,
2006.

(14.) See Grinberg, supra note 7, at 8-9; see also THOMAS RIXEN,
THE POLITICAL ECONOMY OF INTERNATIONAL TAX GOVERNANCE 139 (2008); Steven
A. Dean, The Incomplete Global Market for Tax Information. 49 B.C. L.
REV. 605, 646-48, 650 (2008); William P. Streng, U.S. Tax Treaties:
Trends, Issues. & Policies in 2006 and Beyond, 59 SMUL. REV. 853,
898-99 (2006).

(15.) Grinberg, supra note 7, at 8-9.

(16.) Martin A. Sullivan, Economic Analysis: U.S. Citizens Hide
Hundreds of Billions in Cayman Accounts, 103 TAX Noms 956, 961 (May 24,
2004).

(17.) See generally Foreign Bank Account Reporting and Tax
Compliance: Hearing Before the Subcomm. on Select Revenue Measures of
the H. Comm. on Ways & Means, 111 th Cong. (2009) [hereinafter Bank
Reporting Hearing] (describing motivations for developing FATCA, with a
particular focus on the UBS affair).

(18.) Is I.R.C. [section] 1471(a).

(19.) I.R.C. [section] 1472(a).

(20.) I.R.C. [section] 1471(d)(5).

(21.) Sen. Carl Levin, Senate Floor Statement on the Enactment of
the HIRE Act (Mar. 18, 2010), available at
http://www.levin.senate.govinewsroom/speeehes/speech/senate-floor-statement-on-the-enactment-of-the-hire-act.

(22.) I.R.C. [section] 1472(d).

(23.) I.R.C. [section] 1472(c)(1)(A).

(24.) I.R.C. [section] 1472(c)(1)(D)-(F).

(25.) See Regulations Relating to Information Reporting by Foreign
Financial Institutions and Withholding on Certain Payments to Foreign
Financial Institutions and Other Foreign Entities, 77 Fed. Reg. 9022
(proposed Feb. 15, 2012) (to be codified at Treas. Reg. pt. 1, 301)
[hereinafter Proposed Treas. Regs.VA TCA: Proposed Regulations, SULLIVAN
& CROMWELL LLP, 1, 9 (Feb. 28, 2012),
http://www.sullerom.com/files/Publication/e20b97el-fe70-4ba6-9206-41f39c48285I/Presentation/PublicationAttachment/2a784f61-0c83-4041-8284-45d283cd300e/SC_Publication_FATCA_Proposed_Regulations_2-28-12.pdf.

(26.) I.R.C. [section] 1471(b).

(27.) I.R.C. [section] 1471(b)(1)(A): Levin, supra note 21
-(“Foreign financial institutions are to make use of all customer
identification information about each account to determine whether the
beneficial owners of the account are U.S. persons including using all
information gathered as a result of anti-money laundering and
anti-corruption requirements or efforts.”); FATCA: Proposed
Regulations, supra note 25, at 11-12.

(28.) I.R .C. [section] 1471(c)(1).

(29.) Id.

(30.) I.R.C. [section] 1471(b)(1)(D)(i), (d)(6).

(31.) I.R.C. [section] 1471(b)(1)(F).

(32.) I.R.C. [section] 1471(d)(6).

(33.) I.R.C. [section] 147(b)(1)(F); see also STAFF OF JOINT COMM.
ON TAXATION, 111TH CONG., JCX-4-10, TECHNICAL EXPLANATION OF THE REVENUE
PROVISIONS CONTAINED IN SENATE AMENDMENT 3310, THE -HIRING INCENTIVES TO
RESTORE EMPLOYMENT ACT,” UNDER CONSIDERATION BY THE SENATE 40
(2010), available at
http://www.jcigov/publications.html?func=startdown&id=3648.

(34.) I.R.C. [section] 1471(b)(1)(D)-(E).

(35.) Baucus-Rangel Press Release, supra note 6.

(36.) Pfeifer & Ojutiku, supra note 8, at 17.

(37.) I.R.C. [section] 1471(a).

(38.) I.R.C. [section] 1472(a).

(39.) I.R.C. [section] 1471(b)(1)(D).

(40.) Id.

(41.) I.R.C. [section] 1473(1)(A)(i); see also STAFF OF JOINT COMM.
ON TAXATION, supra note 33, at 44.

(42.) I. R. C A4. [section] 1473 (1)(A)(i); see also STAFF OF JOINT
COMM. ON TAXATION, supra note 33, at 45.

(43.) See Dean Marsan, FATCA: The Global Financial System Must Now
Implement a New U.S. Reporting and Withholding System fir Foreign
Account Tax Compliance, Which Will Create Significant New
Exposures–Managing This Risk (Part I), 88 TAXES 27, 54 (2010); see also
Pfeifer & Ojutiku, supra note 8, at 2.

(44.) See Pfeifer &Ojutiku, supra note 8 at 4:Bank Reporting
Hearing, supra note 17, at 63 (statement of Dick Suringa, Partner,
Covington & Burling LLP).

(45.) I.R.C. [section] 1474(b): see also Pfeifer & Ojutiku,
supra note 8, at 6.

(46.) I.R.C. [section] 1474(11)(3); see also Marsan, supra note 43,
at 52.

(47.) Pfeifer &Ojutiku, supra note 8, at 5 (“[A]s a
practical matter, the potential withholding will create substantial
competitive imbalances between those foreign institutions that enter
into agreements with the [Service], thereby escaping the withholding
requirement, and those that do not.”).

(48.) See Denise Hintzke & Christopher S. Brown, FATCA ‘s
Impact on Structured Products, 17 J. STRUCTURED FIN. 17, 18 (2011); see
also Marsan, supra note 43, at 47.

(49.) I.R.C. [section]1471(b)(1)(D).

(50.) I.R.C. [section] 1474110); see also STAFF OF JOINT COMM. ON
TAXATION, supra note 33, at 46.

(51.) STAFF OF JOINT COMM. ON TAXATION. supra note 33, at 45.

(52.) I.R.C. [section] 1472(b)(1), (3).

(53.) I.R.C. [section] 1472(b)(2).

(54.) I.R.C. [section] 1471(d)(7).

(55.) I.R.C. [section] 1471(b)(1)(D).

(56.) See Harvey, supra note 7, at 13.

(57.) David T. Moldenhauer. PA TA and Fiscal Sovereignty, 2011 TNT
149-6 (Aug. 1, 2011).

(58.) See. e.g., Press Release, U.S. Dept. of Treas., Remarks by
Acting Assistant Secretary Emily McMahon at the NY State Bar Association
Annual Meeting, (Jan. 24, 2012), available at
http://www.treasury.gov/press-center/press-releases/Pages/tg1399.aspx;
FA TCA: Proposed Regulations, supra note 25, at 15.

(59.) Proposed Treas. Regs., supra note 25, at 9029.

(60.) See U.S. Dept. of Treas., supra note 58 (“Fundamentally,
the purpose of FATCA is to obtain information reporting on U.S.-owned
offshore accounts. The withholding requirements incorporated in FATCA
are not intended to raise revenue.”).

(61.) Pfeifer & Ojutiku, supra note 8, at 17.

(62.) Id.

(63.) Michel & Rosenbloom, supra note 7, at 710-11.

(64.) Natario McKenzie, Financial Sector: Dual Citizenship
‘Loophole Fears, TRIB. 242, Feb. 23, 2009,
http://www.tribune242.com/news/2009/feb/23/financial-sector-dual-citizenship-loophole-fears/.

(65.) Michel & Rosenbloom, supra note 7, at 709.

(66.) Comments from the ABA Section of Taxation to Douglas Shulman,
Commissioner, Internal Revenue Serv. 11 (Aug. 16, 2010), available at
http://www.arnericanbar.org/content/dam/aba/migrated/tax/pubpolicy/2010/081610comments.authcheckdam.pdf; see also Grinberg, supra note 7, at 25;
Harvey. supra note 7, at 17.

(67.) See Moldenhauer, supra note 57; see also Michel &
Rosenbloom, supra note 7, at

(68.) Michel & Rosenbloom. supra note 7, at 711.

(69.) Letter from Alex Thursby, Chief Exec. Officer, Austl. &
N.Z. Banking Grp. Ltd., to Douglas H. Shulman. Commissioner, Internal
Revenue Serv. 2 (June 7, 2011) [hereinafter ANZ Comments], available at
http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Tax/ustaxANZ060711_WithCopyright062211.pdf

(70.) Id. at 4.

(71.) See Don’t Ask, Won’t Ten, ECONOMIST, Feb. 11, 2012,
at 61; SWISS BANKERS ASS’N, THE ECONOMIC SIGNIFICANCE OF THE SWISS
FINANCIAL CENTRE (2012), available at
http://www.swissbanking.org/en/20120702-2400-factsheet_finanzplatz_schweiz-rva.pdf.

(72.) Schweizerisches Bankengesetz [BankG] [Banking Code] Nov. 8,
1934, SR 952.0, art.47 (Switz.) [hereinafter Swiss Bank Act].

(73.) Schweizerisches Borsengesetz [BEHG] [Stock Exchange Act]
March 24, 1995, SR 954.1, art.43 (Switz.) [hereinafter Swiss Exchange
Act].

(74.) See Swiss Bank Act, supra note 72; Swiss Exchange Act, supra
note 73.

(75.) See Bank-Client Confidentiality, SWISS BANKING,
http://www.swissbanking.org/en/home/dossiers-link/bankkundengeheimnis.htm (last visited Dec. 14, 2012). Note that the criminal-proceedings
exception is not the only available exception; information may also be
disclosed in connection with bankruptcy proceedings, debt recovery
actions, and probate matters.

(76.) Cantley, supra note 8, at 14; see also J.C. SHARMAN, HAVENS
IN A STORM: THE STRUGGLE FOR GLOBAL TAX REGULATION 22 (2006);
Bank-Client Confidentiality, supra note

(77.) Protocol Amending the Convention between the United States of
America and the Swiss Confederation for the Avoidance of Double Taxation
with Respect to Taxes on Income, U.S.-Switz., Sept. 23, 2009, S. Treaty
Doc. No. 112-1 (2011) [hereinafter 2009 Protocol].

(78.) Id. at art. 3.

(79.) See U.S. DEP’T OF THE TREAS.. TECHNICAL EXPLANATION OF
THE PROTOCOL SIGNED AT WASHINGTON ON SEPT. 23, 2009 AMENDING THE
CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE SWISS
CONFEDERATION FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF
FISCAL EVASION WITH RESPECT TO TAXES ON INCOME 9 (2009) [hereinafter
TECHNICAL EXPLANATION OF THE PROTOCOL].

(80.) 2009 Protocol, supra note 77, at art. 3.

(81.) Id. at art. 4.

(82.) Id.

(83.) TECHNICAL EXPLANATION OF THE PROTOCOL. supra note 79, at 6.
Swiss reluctance to permit bulk exchanges of information was one reason
why the Swiss parliament ultimately had to approve an exchange of
information about 4500 account holders as part of the UBS scandal: no
provision of Swiss law would otherwise authorize the exchange. See
generally Larry R. Kemm & William M. Sharp, Sr., Pending Approval of
UBS Agreement Threatens to Expose U.S. Account Holders of Other Swiss
Banks, 58 TAX NOTES INT’L 753 (May 31, 2010).

(84.) See Moldenhauer, supra note 57, at 529 (“If the
government prohibits local FFIs from complying with one or more elements
of FATCA. they will be nonparticipating FFIs and will incur the taxes on
withholdable and passthrough payments.”).

(85.) Note that there does not appear to be a specific provision of
Swiss law that authorizes involuntary account closure by Swiss banks,
although numerous news accounts indicate that it is possible, at least
when the customer has a choice between account closure and another
remedy offered by a bank. See. e.g., Andrew Clark, Swiss Bank ‘To
Close US Customer Accounts’. GUARDIAN (Apr. 13, 2009, 12:41 PM),
http://www.guardian.co.uk/business/2009/apr/13/credit-suisse-us-tax-avoidance.

(86.) Press Release, Booz & Co., Tax Agreements Accelerate
Consolidation in Swiss Private Banking (Dec. 18, 2011), available at
http://www.booz.com/me/home/press_media/management_consulting_press_releases/article/50186638?tid=39979829&pg=all.

(87.) Id.

(88.) Id.

(89.) See Matthew Allen, Regulator Demands More Tax Transparency,
SWISS INFO (Mar. 27, 2012, 7:00 PM),
http://www.swissinfo.ch/eng/business/Regulator_demands_more_tax_transparency.html’?cid=32370700.

(90.) See Chris Horton, Note, The UBS/IRS Settlement Agreement and
Cayman Island Hedge Funds, 41 U. MIAMI INTER-AM. L. REV. 357,358 (2010).

(91.) Sullivan, supra note 16, at 958.

(92.) Id at 959.

(93.) Confidential Relationships (Preservation) Law (2009) (Cayman
Is.) [hereinafter Confidential Relationships Law].

(94.) Id. at art. 3; see also, Martin Harty, Bank Secrecy–Fact or
Fiction?, STEP JOURNAL (July 2008),
http://www.stepjournal.org/joumal_archive/2008/tqrissue_3_2008/bank_secrecy_-_fact_oraspx.

(95.) Confidential Relationships Law, supra note 93, at art. 3; see
also Cayman Islands: Confidentiality and Legal Professional Privilege,
WALKERS GLOBAL 3-4 (June 15, 2011),
http://www.walkersglobal.corn/Lists/News/Attachments/197/(Cayman)%20Confidentiality%20and%20Legal%20Professional%20Privilege.pdf.

(96.) See Tax Information Authority Law (2009) (Cayman Is.);
Horton, supra note 90, at 365-66.

(97.) Horton, supra note 90, at 365-66.

(98.) Agreement Between the Government of the United States of
America and the Government of the United Kingdom of Great Britain and
Northern Ireland, Including the Government of the Cayman Islands, for
the Exchange of Information Relating to Taxes, U.S.-U.K., art. 5, Nov.
27, 2001, T.I.A.S. No. 13,175.

(99.) See Confidential Relationships Law, supra note 93, at art. 3.

(100.) See Preparing for PA TGA: Cayman Domiciled Investment Funds,
CAYMAN IS. J. (Aug. 3, 2011),
http://www.compasscayman.com/journal/2011/08/03/Preparing-for-FATCA-Cayman-domiciled-investment-funds (“FATCA may cause some funds to
compulsorily redeem certain investors when it is not able to obtain the
necessary investor waivers.”).

(101.) Ellen C. Awwarter, Compelled Waiver of Bank Secrecy in the
Cayman Islands: Solution to International Tax Evasion or Threat to
Sovereignty of Nations?, 9 FORDHAM INT’L. L.J. 680, 684-86 (1985).

(102.) In re ABC Ltd., 1984-85 CILR 130, 135 (Grand Court of the
Cayman Is., 1984); see also Awwarter. supra note 101, at 703-04.

(103.) Awwarter, supra note 101, at 703.

(104.) Sullivan, supra note 16, at 956.

(105.) Horton, supra note 90, at 385.

(106.) See generally Margie Lindsay, Cayman Law Firms Optimistic
About Future of Jurisdiction, HEDGE FUNDS REV. (Apr. 30, 2011),
http://www.hedgefundsreview.com/hedge-funds-review/feature/2046718/cayman-law-firms-optimistic-future-jurisdiction (noting that Cayman
investment structures should prove resilient despite legal changes).

(107.) Michael Cohn, FATCA Isn’t Just for Fat Cats, ACCOUNTING
TODAY (Sept. 7, 2011),
http://www.accotmtingtoday.com/nevvs/FATCA-Fat-Cats-59892-1.html
(quoting the Japanese Bankers Association).

(108.) Daniel J. Mitchell, Why Obama’s FATCA Law Is a Threat
to Business Growth, FORBES (June 20, 2011, 11:50 AM),
http://www.forbes.com/sites/beltway/2011/06/20/why-obatnas-fatca-law-is-a-threat-to-business-growth.

(109.) Act on the Protection of Personal Information, Law No. 57 of
2003 (Japan) [hereinafter PIPA].

(110.) Id. at art.2, [paragraph] 1.

(111.) Id. at art. 23, [paragraph] 1: see also Personal Information
Protection Law in Japan, JONES DAY COMMENTARY (Nov. 2005),
http://www.jonesday.com/files/Publication/ea5c2b75-60ce-498d-80f4-5flda53c1e24/Presentation/PublicationAttachment/b0405b1f-8d64-4fcb-8a7d-6203a553ce80/Personal%20Information.pdf.

(112.) PIPA, supra note 109. at art. 58: Personal Information
Protection Law in Japan, supra note 111, at 4.

(113.) Comments from the Japanese Bankers Ass’n to Internal
Revenue Serv. 24 (June 7, 2011) (emphasis added), available at
http://www.zenginkyo.or.jp/abstract/opinion/entryitems/opinion230637.pdf.

(114.) Comments from the Japanese Bankers Ass’n to Stephen E.
Shay, Deputy Ass’t Sec’y, U.S. Dep’t of Treasury 5 (Oct.
28, 2011), available at
http://www.zenginkyo.orjp/eninews/entryitems/news111028.pdf.

(115.) Ley de Instituciones de Credito [LIC] [Credit Institutions
Law], as amended, art.117, Diario Oficial de la Federacion [DO], 18 de
Julio de 1990 (Mex.).

(116.) Martinez, Algaba, Estrella, Dc Haro y Galvan-Duque, S.C.,
New Banking and Trust Secrecy Regulations in Mexico, LAWYERS NETWORK,
http://www.iln.com/articles/pub_l93.pdf (last visited Apr. 22. 2012).

(117.) Id. at 1-2.

(118.) Comments from Mex. Banking Ass’n and Mex. Sec. Indus.
Ass’n, to Manal Corwin, Intl Tax Counsel, U.S. Dep’t of
Treasury 5 (Apr. 1, 2011) [hereinafter MBA/MSIA Comments], available at
http://www.eticompliance.com/assets/pdf/FATCA_MexicanComments.pdf. At
the time these Comments were written, the associations were awaiting an
evaluation by Mexico’s banking regulators of their interpretation
of the Credit Institutions Law. No further updates are available in
English.

(119.) Id. at 3.

(120.) Id. at 3-4.

(121.) Ley dc Instituciones de Credito [LIC] [Credit Institutions
Law], as amended, art.1I3(b), Diario Oficial de la Federacion [DO], 18
de Julio de 1990 (Mex.).

(122.) MBA/MSIA Comments, supra note 118, at 3.

(123.) See, e.g., ANZ Comments, supra note 69, at 3; American
Chamber of Commerce in Peru, Trade Organization Says FATCA Provisions
Conflict with Peruvian Law, 2011 TNT 116-26 Nay 24, 2011). Deloitte LLP
has assembled a collection of comment letters expressing similar
concerns about FATCA compliance. Foreign Account Tax Compliance Act (FA
TCA) Comment Letters to IRS and Responses, DELDITrE LLP.
http://www.deloitte.com/vew/en_US/us/Services/tax/by-issue/fatca-resourceibrary/e7d4e74a9f948310VgnVCM3000001c56f00aRCRD.htm (last updated Nov.
15, 2012).

(124.) See U.S. Dep’t of Treas., supra note 58. at 3.

(125.) I.R.C. [section] 7201.

(126.) See I.R.C. [section][section] 7201, 7206(2).

(127.) See Abrahm W. Smith, Tax Dodgers Beware: New Foreign Account
Tax Compliance Legislation, 84 FLA. B.J. 52, 56 (2010); Heather Struck,
German Banks Block American Customers, Citing U.S. Tax Act, FORBES (Dec.
14, 2011, 3:45 PM), http://www.forbes.com/sites/heatherstruck/2011/12/14/german-banks-block-american-customers-citing-u-s-tax-act.Note that
financial institutions that drop U.S. accounts will probably still need
to enter into an FFT agreement to avoid penalty withholding; however,
they will not need to do anything to meet the terms of such an
agreement. See Marco A. Blanco & William L. Bricker, Lift after
FATCA: Annoyance or Disaster?: Presentation Before the Swiss-American
Chamber of Commerce, CURTIS LLP (May 10, 2010)
http://www.amcham.ch/events/content/downloads10/051010_life%20after%20fatca.pdf.

(128.) See supra Part I.C.

(129.) See Smith, supra note 127, at 56; Christopher Elias, Foreign
Account Tax Compliance Act Threatens Investment in the US., REUTERS
(Jan. 26, 2012), http://blogs.reuters.corn/financial-regulatory-forum/2012/01/26/foreign-account-tax-compliance-act-threatens-investment-in-the-u-s.

(130.) SHARMAN, supra note 76, at 82.

(131.) See Kimberly Carlson, When Cows Have Wings: An Analysis of
the OED ‘s Tax Haven Work as it Relates to Globalization.
Sovereignty and Privacy, 35 J. MARSHALL L. REV. 163, 177-78 (2002)
(suggesting that violations of sovereignty are more tolerable if
affected countries have an opportunity to negotiate ex-ante with the
prospective violator).

(132.) See SHARMAN, supra note 76, at 83-86.

(133.) Id. at 27.

(134.) See U.S. Dep’t of Treas., supra note 58.

(135.) Id.

(136.) Press Release, U.S. Dep’t of Treas., Joint Statement
from the United States, France. Germany, Italy, Spain and the United
Kingdom Regarding an Intergovernmental Approach to Improving
International Tax Compliance and Implementing FATCA, art. A, 11 1 (Feb.
7, 2012) [hereinafter Joint Statement], available at
http://www.treasury.gov/press-center/press-releases/documents/020712[degrees]/020Treasuty%2OIRS%20FATCA%20Joint%20Statement.pdf.

(137.) Id. at art. A, [paragraph] 2 (“FATCA … has raised a
number of issues, including that FFIs established in these countries may
not be able to comply with the reporting, withholding, and account
closure requirements because of legal restrictions.”).

(138.) Id. at art. A, [paragraph] 3.

(139.) Id. at art. B, [paragraph] 2; see also Marie Sapirie,
Jeremiah Coder & Kristen A. Parillo, Treasury Releases PA TCA Regs,
Multilateral Statement on Info Exchange. 2012 TNT 27-1 (Feb. 9, 2012).

(140.) Joint Statement, supra note 136, at art. B, [paragraph]3.

(141.) Id.

(142.) Id. at art. B, [paragraph]1

(143.) Id.

(144.) Id. at art. B, [paragraph] 112.

(145.) Id. at art A, [paragraph] 4.

(146.) David Jolly & Brian Knowlton, 5 European Nations Agree
to Help U.S. Crack Down on Tax Evasion, N.Y. TIMES (Feb. 8, 2012),
http://www.nytimes.com/2012/02/09/business/globa1/5-european-nations-agree-to-help-us-crack-down-on-tax-evasion.html?_r=0(describing European
Commission praise for the Joint Statement approach).

(147.) See. e.g., Nick Reeve, Ireland and Luxembourg Support
European FATCA Deal, FT ADVISER (Feb. 17, 20 I 2),
http://www.ftadviser.coin/2012/02/17/investments/offshore-funds/ireland-and-luxembourg-support-european-fatca-deal-AalOcGugxkfNiHJYblql0H/article.html; Isle of Man Treas., Isle of Man to Work Closely with U.K. on
FATCA Issues, 2012 WTD 38-24 (Feb. 24, 2012).

(148.) Press Release, Dep’t of the Treas., Treasury,
Switzerland Agree to Pursue Framework for Cooperation for Implementing
FATCA (June 21, 2012), available at
http://www.treasury.gov/press-center/press-releases/Pages/tg1619.aspx;
Press Release, Dep’t of the Treas., Treasury, Japan Agree to Pursue
Framework for Cooperation for Implementing FATCA (June 21, 2012),
available at http://www.treasury.gov/press-center/press-releases/Pages/tg1618.aspx.

(149.) See supra note 147 and accompanying text; see also Michael
Cohn, U.S. Strikes FATCA Deals with Switzerland and Japan, ACCOUNTING
TODAY (June 21. 2012).
http://www.accountingtoday.cominews/fatca-switzerland-japan-treasury-63091-1.html. The Swiss and Japanese agreements vary from the Model I
approach in the degree to which they relieve FFIs from the obligation to
perform certain withholding requirements. See FATCA International
Agreements, SULLIVAN & CROMWELL LLP (Nov. 28, 2012),
http://www.sullcrom.com/FATCA_International_Agreements/.

(150.) See Marie Sapirie, Systems Design Challenges Ahead for Banks
in Implementing FATCA,2012 TNT 49-2 (Mar. 13, 2012).

(151.) Swiss Seal Austrian Tax Deal to Save Privacy Laws, SWISS
INFO (Apr. 13, 2012, 5:18 PM),
http://www.swissirdo.ch/eng/Specials/Rebuilding_the_financial_sector/Spotlight_on_banking_secrecy/Swiss_seal_Austrian_tax_deal_to_save_privacy_law.html?cid=32477278 [hereinafter Tax Deal]. Note that, according to
Itai Grinberg, none of the RUBIK deals have been fully ratified. See
Grinberg, supra note 7, at 27-28.

(152.) See Daniele Mariani, RUBIK Deals Run into Trouble, SWISS
INFO (Jan. 22, 2012, 6:45 PM),
http://www.swissinfo.ch/eng/business/Rubik_deals_run_into_trouble.html?cid=31923872; Grinberg, supra note 7, at 27-29.

(153.) Tax Deal, supra note 151; see also Nicholas Shaxson, Swiss
Rubik Tax Deals Are Effectively Defunct, But Zombie Refuses to Die,
ESCAPE FROM EUROPE (Feb. 23, 2012, 6:09 PM),
http://blogs.euobserver.com/shaxson/2012/02/23/swiss-rubik-tax-deals-are-effectivelydefunct-but-zombe-refuses-to-die.

(154.) See, e.g. Tanguy Verhoosel, Rubik Agreements with
Switzerland Draw Barrage of Criticism, EUROPOLITICS (Oct. 24, 2011),
http://www.europolitics.info/europolitics/rubik-agreements-with-switzerland-draw-barrage-of-criticism-art316477-46.html.

(155.) See Michel & Rosenbloom, supra note 7, at 710-11;
Stafford Smiley, Qualified Intermediaries, The EU Savings Directive.
Trace: What Does FATCA Really Add?, CORP. TAX’N, Sept.-Oct. 2011,
at 20, 25-26.

(156.) European Union Savings Directive: Countering Cross-Border
Tax Evasion by Individuals, HM REVENUE & CUSTOMS,
http://www.hmrc.gov.uk/esd-guidance/ (last visited Dec. 9, 2012).

(157.) Council Directive 2003/48, arts.5-7,2003 O.J. (L 157) 38
(EC).

(158.) Id. at art. 4 (defining “paying agent” as
“any economic operator who pays interest to or secures the payment
of interest for the immediate benefit of the beneficial owner.”).

(159.) Id at art. 8.

(160.) Id.

(161.) Id. [paragraph] 16.

(162.) SHARMAN, supra note 76, at 30-31.

(163.) The transitional regime is slated to end when certain
non-E.U. states agree to the automatic exchange of information with
member states. See Council Directive 2003/48, arts. 10.2003 O.J. (L 157)
38 (EC).1tai Grinberg suggests that this qualification makes the
transitional period “indefinite.” Grinberg, supra note 7, at
20.

(164.) See Council Directive 2003/48, arts. 11,2003 O.J. (L 157) 38
(EC). The withholding tax starts at a rate of fifteen percent and
gradually increases to thirty-five percent. Id.

(165.) Grinberg. supra note 7, at 20-21.

(166.) See ISLE OF MAN FINANCE. GUIDE TO THE EUROPEAN SAVINGS TAX
DIRECTIVE 2 (2005), available at
http://www.gov.im/lib/does/iomfinance/brochures/guidetotheeuropeansavingstaxdirectiv.pdf (noting that EUSD did not take effect until
preconditions were met to “ensure … a ‘level playing
field’ … for those countries and territories affected”).

(167.) U.S. Dep’t of Treas., supra note 58.

Peter Nelson *

* This Note was written as part of an independent research project
supervised by Professor George Yin in the Spring of 2012. With the
exception of some new intergovernmental agreements reached in the Fall
of 2012, it does not address developments in the FATCA implementation
process since then.