This is Part 1, in a series.
Over the past few years, a slew of journalistic investigations and academic research have exposed how the wealthy and politically connected around the world exploit a network of opaque laws and regulations to launder money and hide assets offshore. The revelations forced a swift reckoning in legislatures around the globe as lawmakers held hearings, prosecutors launched inquiries, and some politicians even resigned their seats. In the United States, President Joe Biden wants to keep that momentum going. In December 2021 the White House released an ambitious anti-corruption project: the first-ever United States Strategy on Countering Corruption. The 40-page strategy is made up of five different pillars to curb illicit finance, modernize the government’s anti-corruption tools, and strengthen diplomatic relationships, among other goals. If the full strategy is realized, it will usher in the most dramatic changes to America’s anti-corruption strategy in recent memory. Over the next few weeks, a series of articles will examine these pillars and what this new anti-corruption campaign could mean for taxpayers.
Corruption is a chief national security concern for the White House because money laundering and offshore tax evasion can provide a flowing financial pipeline for autocratic leaders. On one hand, corruption provides a convenient slush fund to power their regimes. On the other hand, corruption also fosters a pay-to-play system where autocrats can pay off political and economic elites who are willing to ignore various democratic abuses in exchange for their personal financial gains.
Because of this, on June 3, 2021, the Biden administration declared that the fight against corruption is both a core U.S. national security interest and a global issue, as corruption presents dangers for global economic equity, global anti-poverty and development efforts, and the institution of democracy.
“[B]y effectively preventing and countering corruption and demonstrating the advantages of transparent and accountable governance, we can secure a critical advantage for the United States and other democracies,” he wrote in a National Security Study Memorandum.
In response, a coalition of federal departments and agencies conducted an interagency review of the government’s existing anti-corruption efforts in the first few months of 2021. Their findings laid the foundation for the U.S. Strategy on Countering Corruption.
A Transnational Focus
International coordination and investigations will be the core part of the U.S.’ strategy, as the government wants to focus on transnational corruption and the avenues in which the U.S. financial system and other rule-of-law based systems have been exploited for money laundering purposes.
“While the U.S. Government has long recognized countering corruption as an important foreign policy goal, a growing understanding of corruption’s strategic impact and the increasing interconnectedness of the global economy underscores the need for a new approach,” the report says. That approach looks like addressing vulnerabilities in both America’s financial systems and international financial systems; bolstering international best practices, regulations, and enforcement efforts; supporting non-governmental organizations pursuing anti-corruption work, building political will and devising effective enforcement actions.
The government realizes that satisfactory progress may take decades to develop, but it believes the outcome will be well worth the wait. Transnational corruption is particularly troublesome because it can severely impact the ability of lower income countries to raise revenue, and keeps them dependent on foreign aid. In Africa alone, about $88.6 billion—equivalent to 3.7 percent of the entire continent’s GDP—is lost due to illicit financial flows,as cited by the U.N. . (United Nations Conference on Trade and Development Economic Development in Africa Report 2020).
The five pillars of the U.S. Strategy Against Corruption are:
Modernizing, coordinating, and resourcing U.S. Government efforts to fight corruption;
Curbing illicit finance;
Holding corrupt actors accountable;
Preserving and strengthening the multilateral anti-corruption architecture; and,
Improving diplomatic engagement and leveraging foreign assistance resources to advance policy goals.
To maintain accountability, federal departments and agencies will coordinate every year with the National Security Council, National Economic Council, and Domestic Policy Council to report their progress to the White House.
In more concrete terms, what will this five-pillar strategy mean? It means the U.S. government will turn its attention toward anonymous shell companies, opaque transactions, and professional service providers like lawyers, accountants, and financial services companies. Over the coming months and years, professionals should anticipate that the White House will tap existing authorities and even Congress, to create new regulations and laws ensuring transparency and accountability for service providers. (See our previous article on the Pandora Papers) The government wants to ensure that professional services providers are operating within both the letter and spirit of the law.
Cross-Border Tax Payers in the Crosshairs
Meanwhile, taxpayers should expect increased enforcement. In the U.S. For example, the Biden administration has vowed to increase the Internal Revenue Service’s funding so it can better investigate wealthy and corporate taxpayers. Internationally, the U.S. is part of the Joint Chiefs of Global Tax Enforcement (the J5) which is a collaboration between tax authorities in the United Kingdom, Canada, Australia, and the Netherlands to investigate and prosecute international tax cheats.
This is important for taxpayers, especially those with cross-border accounts or activity, who may be unaware of their U.S. filing and reporting obligations and may become unwittingly caught in the government’s crosshairs. For additional information on this trend, please see my previous articles: Are You FIRPTA Compliant? IRS Targets Foreign Holders of U.S. Real Estate; as well as FATCA Filing: What U.S. Citizens Need to Know About Foreign Asset Reporting.
The U.S. five-pillar strategy is ambitious, and although it will take years to successfully implement this strategy, individual, institutional and corporate taxpayers, especially those with cross-border holdings, should not be complacent. They should start to think about how this new strategy might affect their tax disclosures and activity moving forward. But given the breadth, depth, and complexity of the strategy, they should seek advice from a knowledgeable international tax professional, who can keep them abreast of new changes as they develop.