In the current environment of increased regulation, transparency, reporting and heightened compliance standards, the US and its Government Agencies have an arsenal of tools with extraterritorial application. Following is FATCA, FCPA, AML and OFAC:
- FATCA: requires Foreign Financial Institutions to report information directly to IRS about financial accounts held by U.S. taxpayers or by certain foreign entities controlled by US Taxpayers.
- FCPA: prohibits payment of bribes to foreign officials to assist with obtaining or retaining business. It also requires companies whose securities are listed in the US to make and keep books and records that accurately and fairly reflect their transactions and devise and maintain adequate systems of internal accounting controls.
- AML: rules that assist with detecting and reporting suspicious and fraudulent activity related to money laundering and terrorist financing. AML rules are part of the Banks Secrecy Act.
- OFAC: administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the US.
The application of these US extra territorial laws have changed the landscape regarding business conducted outside of the US. The US leads the way with requiring greater transparency and compliance in order to fight corruption. At the end, it is almost impossible for international financial transactions to avoid the US financial system and the US dollar. Thus, other jurisdictions want to ensure compliance with US regulations.
So far, it seems that the US is obtaining the results it wants from its extra-territorial tools. However, the enforcement of these tools has aggravated many foreign countries and officials because many feel that the US with its number of long arm laws, is not fully “reciprocal”. For instance, with FATCA, the US has reciprocity with countries via the Intergovernmental Agreements. However, the US is receiving criticism for not exchanging as much information as it is receiving (lack of account balances and beneficial ownership information). In addition, the US has made it clear that it does not currently intend to adopt the Common Reporting Standard (CRS). The CRS is an automatic exchange of tax and financial information at a worldwide level, approved by the Organization for Economic Co-operation and Development (OECD) in 2014. Over 100 Jurisdictions are committed to exchanging information with each other under the CRS, starting in September, 2017. The reported rationale behind the US decision is that FATCA “gets it done” and fulfils the needs of the US. This decision leaves the US as a “non-participating jurisdiction” with respect to the CRS.
The lack of FATCA complete reciprocity and participation in the CRS coupled with the secrecy laws of several states in the US has signaled the US as the new tax haven. The US continues to receive international grumbling because of the existence of US shell corporation capitals like Nevada, South Dakota, Wyoming, and Delaware. These states are known to the international community as secrecy jurisdictions. Incorporating in the US is a state matter (as opposed to a federal matter) and state incorporation agents don’t always have to collect ultimate beneficial ownership (UBO) information. Many foreigners have transferred their wealth to the US because of the implicit protection provided by it not being a CRS jurisdiction and state secrecy laws that protect the identity of US shell entity UBOs. In sum, many find that the US is not playing a fair game while it utilizes its own law internationally while protecting its own jurisdiction through its multi-level entity regulatory structure.