Treasury Targets Foreign-Owned LLCs to Battle Tax Evasion

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By Kevin A. Bell

May 5 — The Obama administration is looking to shut down more of the routes used by tax evaders, corrupt politicians and money launderers, aiming directly at abuses with foreign-owned single-member limited liability companies.

In a May 5 letter to House Speaker Paul D. Ryan (R-Wis.), Treasury Secretary Jacob J. Lew said the administration has finalized new rules to close some of the gaps in the existing system, including one to require foreign-owned “disregarded entities,” including foreign-owned single-member LLCs, to obtain an employer identification number from the IRS.

Lew also asked Congress to swiftly pass meaningful beneficial ownership legislation, provide full reciprocity with U.S. FATCA partners, and approve pending bilateral tax treaties as a way to help curb abuses, such as those revealed in the recent leak of documents from Panama law firm Mossack Fonseca & Co.

Another regulatory action to strengthen financial transparency and combat the misuse of companies to engage in illicit activities includes customer due-diligence final rules impacting financial institutions.

Focus on LLCs

U.S. Deputy Assistant Treasury Secretary for International Tax Affairs Robert Stack, speaking during a White House conference call announcing the actions, said the federal tax system has very strong information reporting requirements for most types of entities formed in the U.S., but typically single member LLCs are a narrow class of foreign-owned U.S. entities that have no obligation to report information to the IRS or to get a tax identification number.

Stack said these disregarded entities can be used to shield the foreign owners of non-U.S. assets or non-U.S. bank accounts.

“Our rule will require that disregarded entities, including single-member LLCs, formed in the U.S. with a non-U.S. owner obtain an employment identification number from the IRS and report ownership and transactional information to the IRS,” Stack said. Once these regulations are finalized, they will allow the IRS to determine whether there is any tax liability, and if so, how much, and to share information with other tax authorities.

Beneficial Ownership Bill Needed

Lew's call for legislation on beneficial ownership would require companies to “know and disclose the real person behind a company at the time of its creation,” he said. “Criminals are currently able to misuse companies to hide this beneficial owner, significantly weakening our ability to fight financial crime. This problem can only be resolved with congressional action.”

Under the legislation, legal entities formed or qualified to do business within the U.S. would be required to file this information with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, and face penalties for failure to comply.

Jennifer Fowler, Treasury Department deputy assistant secretary for terrorist financing and financial crimes, said in the call that the misuse of companies to hide beneficial ownership is a significant weakness in the U.S. anti-money laundering/counter financing of terrorism regime that can only be resolved by congressional action.

In addition, the Senate should approve eight pending tax treaties which are critical to fully enforcing U.S. tax laws, Lew said in his letter. The tax treaty with Switzerland has been pending since January 2011, and a tax treaty with Luxembourg since November 2010.

“Finally, we must ensure that the United States can live up to its end of the bargain on foreign tax reporting,” Lew said. The U.S. doesn't provide its Foreign Account Tax Compliance Act partners with the same information about U.S. financial institutions that foreign financial institutions must provide to the IRS.

The Treasury secretary said reciprocity with other jurisdictions “is a key component of any successful strategy for combating international tax evasion.” The president has proposed providing full reciprocity under FATCA in his last three budgets. “Congress should enact this proposal as soon as possible,” he said.

CDD Final Rules

Fowler said Treasury also is issuing new customer due-diligence final rules that add a new requirement for financial institutions. Banks; brokers or dealers in securities; mutual funds; futures commission merchants; and introducing brokers in commodities will have to collect and verify the personal information of the real people—beneficial owners—who own, control and profit from companies when those companies open accounts.

Fowler said the new rules contain three core requirements:

  •  identifying and verifying the identity of the beneficial owners of companies opening accounts;
  •  understanding the nature and purpose of customer relationships to develop customer risk profiles; and
  •  conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

 

Under the final rules, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity.

Fowler said based on comments received in response to the proposed rules published in August 2014, the final rules extend the proposed implementation period from one year to two years.

Anti-Corruption Legislation

At the same time, the Department of Justice will ask Congress for changes it said are necessary to effectively investigate and prosecute organized crime, kleptocrats, terrorists and others seeking to hide illegally gained transnational funds.

Justice Department officials said the proposals include expanding foreign money laundering predicates to include violations of foreign law that would be a money laundering predicate if committed in the U.S. The move would allow prosecutors to prosecute proceeds from the full range of foreign corruption activities criminalized pursuant to the 2003 U.N. Convention Against Corruption.

The proposals also seek to:

  •  allow administrative subpoenas for money laundering investigations;
  •  enhance U.S. law enforcement authority to obtain overseas records as a form of legally admissible evidence;
  •  create a mechanism to use and protect classified information in civil asset recovery cases; and
  •  extend to 90 days from the current 30 days the time period in which the U.S. can restrain property based on a request from a foreign country and extend the procedures to authenticate foreign records of regularly conducted activity in criminal cases to civil asset recovery cases.

 

“In criminal money laundering investigations, such records are obtained through the issuance of grand jury subpoenas, but law enforcement occasionally needs the speed and flexibility to subpoena administratively,” the DOJ said.

The Justice Department said the change is necessary because investigations involving high-ranking foreign government officials increasingly involve classified information. The DOJ also is proposing to amend 18 U.S.C. Section 666 to expressly criminalize a corrupt offer or acceptance of payments that reward or influence official action. It also wants to lower the threshold for individual payments under the section from $5,000 to $1,000.

To contact the reporter on this story: Kevin A. Bell in Washington at kbell@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com

For More Information

Texts of Lew's letter to Ryan and Treasury's news release are in TaxCore.