South American countries have many reasons to be jealous of the United States. Most days, we have stable federal government. Our standard of living is mind-blowing for many people in impoverished countries. They view us as the land of opportunity. We argue about our health care system, but almost everyone gets the care they need. Add to all this, with FATCA we have found a very effective way to bully foreign governments and financial institutions into giving us previously unobtainable information on U.S. taxpayers. This allows the IRS to make sure they are collecting every possible dollar from U.S. taxpayers who have offshore assets.

A Brief History of Offshore Banking

In the not too distant past, wealthy Americans and wannabe wealthy Americans found it convenient and/or fashionable to put much of their wealth in offshore financial institutions. Although it was not the only player in this game, Switzerland attracted much of the American wealth which was banked offshore. There are many countries in the Caribbean as well as Israel who were more than willing to provide this service, but Switzerland was the biggest name in the industry.

The requirement for U.S. taxpayers to report all income, including income earned outside the United States, is not new. However, prior to 2010 many individuals with overseas accounts failed to mention this fact when they filed their 1040’s. Why? That’s simple. It was very unlikely that the IRS was ever going to know the difference.

Then Along Came FATCA

The Foreign Account Tax Compliance Act was passed in March of 2010. The Department of Justice and the IRS instantly began to salivate. This gave them the enforcement tools to make foreign countries and banking institutions play by our rules whether they liked it or not. The act gets its teeth from two provisions:

Non-compliant foreign financial institutions face a mandatory 30% withholding on payments from U.S. based financial institutions. (Ouch!)
The FATCA also beefed-up the ability of the Department of Justice to prosecute financial institutions criminally who were assisting U.S. taxpayers with tax evasion.

Switzerland’s financial industry had painted a bulls-eye on itself by its rich history of telling the Justice and Treasury Departments to go pound sand in response to previous requests for disclosure of U.S. taxpayer information.

Under FATCA, Swiss banking powerhouse UBS was forced to turn over the names and information of 4,000 U.S. taxpayers. In order to settle a corporate criminal action for failure to comply, UBS paid a $780 million dollar fine. Many Swiss institutions got the point and came into compliance. To prove its power to bankers who didn’t comply after UBS, the DOJ’s next target was Switzerland’s oldest bank, Wegelin & Co. The shot proved fatal. Wegelin paid $74 million in fines, restitution and forfeitures, and ceased to do business to avoid criminal liability.

In August of 2013, Switzerland raised the white flag. To avoid further prosecutions, Switzerland signed an agreement in exchange for non-prosecution agreements (NPA’s) for banks that have facilitated American tax evasion. In December, 100 Swiss banks joined in the proposed amnesty deal with the DOJ. There is still ongoing debate over the fairness of the Justice Department’s NPA proposal. However, it appears Switzerland and many other countries got the message clearly. The United States will no longer tolerate the non-disclosure of U.S. taxpayer information.

South America Sees Green

Many South American nations have turned green in the glow of FATCA. This of course has nothing to do with these countries’ environmental policies. It has everything to do with jealousy and money. Many of these countries want to replicate the U.S.’s success story in Switzerland.

The first two players to enter the ring are Colombia and Panama. Panama has long been one of the premier banking centers of South America. Panama’s financial industry and the Canal Zone make up almost all of the country’s GDP. Prior to FATCA, banks in Panama did not collect information on accounts held by nonresident depositors. Because they didn’t collect the information, there was nothing to share when other countries’ enforcement officers paid a visit to ask. Seeing the decimation caused in Switzerland, Panama very quickly became FATCA-compliant with very little fuss.

This is driving Panama’s neighbor Colombia insane. The Columbians have attempted to pry this information out of Panama’s financial institutions for years. Colombia, like the United States, requires its taxpayers to fully disclose offshore accounts and income. If the money is held in Panama, it is seldom disclosed because the risk of disclosure is virtually non-existent. In that sense, Columbia is like the United States and Panama is like Switzerland. Officials in Bogotá estimate the revenue loss from non-disclosure of offshore bank income at $2 billion to $7 billion annually.

After FATCA, Colombia tried again to get the same treatment for their citizens with money in Panama. If Panama’s banks could collect taxpayer information for the United States, they certainly could collect it for Colombia. Colombia offered a Tax Information Exchange Agreement (TIEA.) Predictably, Panama said no. After all, Colombia has virtually no information to offer Panama in exchange.

Colombia did not take this rejection well. Especially because of the fact that Panama is already collecting and providing this information for its U.S. clients. It clearly has the capability, but not the desire. Colombia made very loud rumblings about branding Panama a “tax haven.” This legal designation comes with punitive taxes on money transfers into Panama similar to what is found in FATCA. It also would give a black eye to Panama’s whole financial system. That could slow down foreign investment in Panama.

Panama did not take these threats lightly. In retaliation, it threatened to deport all Colombian workers, and impose travel restrictions on Colombians. As a bonus, it threated to drive all Colombian prisoners being held in Panama jails to the boarder and “repatriate” them. Panamanian officials also started to talk about a 300% tariff on goods from Colombia, and the cancelation of a cross-border electricity sharing agreement.

After the countries exchanged their initial volleys, cooler heads prevailed. In exchange for Colombia’s agreement to tone it down with the “tax haven” designation, Panama has agreed to discuss a TIEA. Game, set and match – Colombia.

In the next few months, it will be interesting to see what other revenue-starved nations attempt this technique to get disclosure and increase tax revenues.

Original Post By:  Michael DeBlis