FATCA paper

The Indonesian Journal of International & Comparative Law
ISSN: 2338-7602; E-ISSN: 2338-770X
http://www.ijil.org
© 2014 The Institute for Migrant Rights Press
968
There are Many Ways to Catch
FATCAts
What Impact Will The Foreign Account Tax Compliance Act
(FATCA) Have on Caribbean Nations’ Privacy Laws and Costs
Associated With Non-Compliance
Charles S. Bowen Jr.
Attrney at Law
E-mail: bowenc@alumni.charlottelaw.edu
The growing concept of financial institutions operating as active cross-border
“tax intermediaries” is one of the underlying principles for more aggressive and
multinational legislation; however, there is the potential for substantial ramifications
and externalities, both in the legal and economic arenas, that may derive from
FATCA and subsequent legislation. Pursuant to this determination that FFIs
are being utilized and called upon to implement more effective automated tax
information exchanges with domestic and international tax authorities, the issue for
underdeveloped Caribbean nations is finding a method to operate in the most cost
effective manner without violating domestic laws and existing treaties. This can also be
beneficial towards maintaining some form of economic sovereignty. The most optimal
method in doing so is identifying the extent that existing treaties and/or agreements
provide guidance as to how FFIs can operate in an automated information exchange
because of the colossal implementation and operational information technology costs
that are associated with complex compliance reporting of private data. Once potential
problems are identified, the most logical step is to determine how to enter an IGA
that promotes economic stability, privacy considerations, compliance cost avoidance,
and mitigating any business disruptions that can potentially exceed any penalty or
fine under FATCA. The Caribbean nations have demonstrated a more sophisticated
and effective cross-jurisdictional compliance platform than prevailing perspective of
their financial services regulatory scheme; however, the implementation of FATCA

ThereareManyWaystoCatchFATCAts
969
is the most pervasive and imposing legislative act yet for tax evasion and the ability
to utilize the IGA system for preventive measures in all facets of compliance is most
practical in considering this emerging and early phase of FATCA’s unilateral rather
than bilateral approach.
Keywords: Accounting Law, Banking and Finance, Bankruptcy Law, Corporation and
Enterprise Law, Securities Law, Tax Law.
One of the great mistakes is to judge policies and programs by their
intentions rather than their results. . . . Many people want the
government to protect the consumer. A much more urgent problem is to
protect the consumer from the government.―Milton Friedman1
I. INTRODUCTION
In 2009, in the wake of a financial crisis with accompanying scrutiny
of the banking industry, and in the midst of a re-election campaign,
President Barack Obama stated: “I did not run for office to be helping
out a bunch of, you know, fat-cat bankers on Wall Street.”2
With an aim
towards preventing tax evasion, money laundering, and terrorist financing,
extraterritorial legislation has become the rule, rather than the exception
in recent years. With various tax evasion, anti-money laundering, and
financial disclosure pieces of legislation coming into effect as of late, the
most imposing and impactful law is the Foreign Account Tax Compliance
Act (FATCA).
FATCA is a recently enacted law that is a part of the Hiring Incentives
to Restore Employment (HIRE) Act of 2010 and created four new
1. Interview with Richard Heffner on The Open Mind (Dec. 7, 1975), available
at http://www.youtube.com/watch?v=vOr668rBpIE. Milton Friedman was an
American economist, statistician, and author who taught at the University of
Chicago for more than three decades. He was a recipient of the Nobel Memorial
Prize in Economic Sciences, and is known for his research on consumption
analysis, monetary history and theory, and the complexity of stabilization policy.
The Economist described him as “the most influential economist of the second
half of the 20th century...possibly of all of it.”
2. David Jackson, Obama: ‘Fat-cat’ bankers owe help to U.S. taxpayers, U.S.A. Today,
Dec. 18, 2009, 10:12 AM, http://usatoday30.usatoday.com/money/industries/
banking/2009-12-13-obama-bankers-small-business_N.htm.

TheIndonesianJournalofInternational&ComparativeLawVolumeIIssue4(2014)at968–991
970
sections of the Internal Revenue Code.3
It requires financial institutions
to use enhanced due diligence procedures to identify United States (U.S.)
persons who have invested in either non-U.S. financial accounts or non-
U.S. entities.4
The intent behind FATCA is to keep U.S. persons from
hiding income and assets exceeding $50,000 overseas by requiring foreign
financial institutions (FFIs)5
of broad scope—banks, stock brokers, hedge
funds, pension funds, insurance companies, trusts—to report directly to
the IRS all clients’ accounts owned by U.S. Citizens and U.S. persons,
including Green Card holders.6
An FFI could face significant consequences if it fails to enter into
an agreement—Inter-Governmental Agreements (IGAs) Tax Information
Exchange Acts (TEIAs), Double Taxation Agreements—with the Internal
Revenue Service (IRS) in order to provide the U.S. and tax authorities
with requested information related to an investor or banking customer
with the FFI. In order to successfully adapt to this stringent and complex
compliance scheme, the FFI’s will need to have the ability to align all
the key stakeholders, including operations, technology, risk, legal,
and tax. This will be paramount to successfully comply with FATCA.
The institution would be subject to a 30% withholding tax on any
“withholdable payment” made to its proprietary account for failing to
comply with FATCA.7
As a result, all payments of U.S. source income—
interest and dividends—will be taxed along with U.S. source capital
gains.8
Additionally, accountholders who don’t provide the FFI with
FATCA required documentation will be deemed recalcitrant, resulting
in the FFI then being obligated to deduct a 30% withholding tax on any
3. 26 U.S.C. §§1471-1474; I.R.C. §§1471-1474.
4. Id.
5. 26 U.S.C. § 1473(d)(4). A Foreign Financial Institution has been defined as any
foreign entity that meets at least one of the following: (1) Accepts deposits in the
ordinary course of a banking or similar business; (2) is in the business of holding
financial assets for the account of others; or (3) is primarily engaged in the business
of investing, reinvesting, or trading in securities, partnership interests (including
futures or forward contracts or options), certain commodities, or any interest in
such instruments.
6. 26 U.S.C. § 1471.
7. Id.
8. Id.

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withholdable9
payment credited to their accounts.10
The IRS has identified
two main areas in which it has sought to enforce tax compliance: first,
in the voluntary nature of the payment of taxes, by withholding at the
source of certain payments to eliminate the possibility of nonpayment;
and second, by ensuring that the government has another source of
information to compare against the taxpayer’s filings.11
Despite FATCA being economic in nature and deriving from the U.S.,
its reach will far exceed the economic realm and impact the legal domain
within the Caribbean.12
From the beginning of FATCA’s enactment,
members of the Caribbean Association of Banks13
(CAB) expressed their
concerns to the regional ministers of finance regarding the impact FATCA
will have on financial services institutions, corporations, individuals and
the industry as a whole.14
In 2012, a session was held in St. Lucia to
inform public sector representatives and members of the financial and
legal sectors, of several concerns.15
Among many other concerns, those
9. Id. Withholdable payments are income derived from interests, dividends, trading
of securities,
10. 26 U.S.C. § 1471
11. Melissa A. Dizdarevic, The Fatca Provisions of the Hire Act: Boldly Going Where No
Withholding Has Gone Before, 79 Fordham L. Rev. 2967, 2972 (2011).
12. Throughout this article, when stating “Caribbean” I am indentifying
principal participants in the financial services industry and am
referencing nations within CARICOM (Antigua and Barbuda, Barbados,
Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent
and the Grenadines, Trinidad and Tobago).
13. The Caribbean Association of Banks, Inc is a community of banks and other
financial institutions in the Caribbean/CARICOM region, whose mission is
to advance the interest of member institutions through advocacy, networking,
provision of training and other solutions to strengthen the Caribbean financial
sector. Caribbean Bankers List FATCA Concerns for CARICOM, Carribean 360,
June 28, 2012, http://www.caribbean360.com/index.php/business/592605.
html#axzz2n7JNKD6y
14. Id.
15. Id. Coming out of this session, participants raised a number of concerns about
FATCA’s impact including potential conflict with local privacy laws; impact of
tax information exchange agreements and double taxation laws which may not
exist in some countries; questions about governments’ roles given there have been
few public announcements or statements by regional governments or regulators;
the huge cost of compliance; the changes required to systems, technology and
processes before January 2013; individual expense that may be incurred to prove
an individual is not a US citizen, should they fall within any of the US person
indicators; and the responsibilities of support professionals such as auditors and
lawyers.

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raised were how FATCA will impact local Caribbean privacy laws, what
the impact of tax information exchange agreements, governments’ roles,
the colossal cost of compliance, individual expenses, and technological
changes will be.16
The externalities of FATCA extend to the political arena
as well.17
Commentators have speculated that FATCA will conflict with
privacy and data protection laws in addition to conflicts with local laws—
causing Caribbean nations to alter and repeal existing local laws.18
The
Trinidad & Tobago Finance and Economy Minister, Larry Howai, has
even described the pervasive and extraterritorial legislation as “onerous”19
;
the Governor of the Central Bank of Trinidad & Tobago has labeled it as
“an attempt to convert foreigners into unpaid IRS agents . . . a kind of
U.S. backward imperialism.”20
In addition to Caribbean leaders conveying
the notion that FATCA is pervasive in nature, there are telling statistics
to support their speculation towards financial compliance issues. One
of which is that, regarding the effectiveness of complying with United
States tax laws is that the United States is sixty second (62nd) out of one
hundred eighty three (183) in the time that it takes to comply with tax
laws.21
FATCA derived from good intentions, but the implementation of
it will have a substantial impact on various nations—not all of which
are beneficial—especially those with both unstable economic and legal,
climates such as the Commonwealth Caribbean. Section II will comprise
of the background FATCA, the landscape preceding FATCA and the
variousdifferenttaxinformationexchangeagreementsutilizedduringsuch
time, the pertinent FATCA provisions that may impact local Caribbean
16. Id.
17. David Jessop, Caricom Punts On FATCA: Summit Ignores U.S. Push As World
Tax Police, Jamaica-Gleaner, July 15, 2012, http://jamaica-gleaner.com/
gleaner/20120715/business/business9.html. Externalities are when the legal
system is costly and cumbersome and unpredictable, mutually beneficial trades
may often not take place because of potentially high transactions costs involved in
protecting and enforcing complex property rights and contracts once made.
18. Id.
19. Trinidad Finance Minister: Requirements of US FATCA Law “Onerous”, Caribbean
Journal, Oct, 31, 2012, 1:43 p.m., http://www.caribjournal.com/2012/10/31/
trinidad-finance-minister-requirements-of-us-fatca-law-onerous/.
20. Jwala Rambarran, Remarks at the Meeting of the Council of Securities Regulators
of the Americas (COSRA) (Oct. 29, 2012), http://www.bis.org/review/r121105c.
pdf.
21. http://www.pwc.com/us/en/financial-services/what-is-fatca.jhtml.

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laws and the arguments by critics against FATCA and its pervasive and
imposing nature. Section III contains a discussion and analysis as to how
despite FATCA’s imposing and extraterritorial reach, Caribbean nations
will need to enter into IGAs in order to avoid dying in the U.S. and
Global financial markets. Additionally, this section provides arguments
likely presented by critics to this proposed solution. Lastly, section IV
will bring together the presented arguments, proposed solutions, and
critiques in a cumulative conclusion that explains why entering into a
Model II IGA would be most optimal for a Caribbean nation in avoidance
of violating domestic laws and incurring non-compliance costs that can
cause a business disruption.
As with any discussion regarding the fusion of legal and economic
matters involving tax, there are a plethora of issues and dilemmas that
can be addressed; however, it should be born in mind that despite this
paper encompassing components of analysis as to the effectiveness
and style of tax compliance programs associated with FATCA and tax
evasion in general, this paper solely focuses on the impact FATCA will
have on Caribbean nations22
utilizing these analytical components rather
than joining in the discussion as to how foreign financial institutions
in other nations will be impacted or should react. Lastly, this article
does not assess the impact of the United Kingdom (U.K.) or European
financial markets despite the high level involvement of United Kingdom
“Crown” dependencies because of the vast majority of Caribbean nations
collectively approaching FATCA.
II. BACKGROUND
According to a 2011 study conducted by the Tax Justice Network, it’s
estimated that, on average, governments worldwide lose $3 trillion to
offshore tax evasion; the United States loses $377 billion a year; European
nations—U.K., Italy, Spain, and France—each lose approximately $100
22. Throughout this article, when stating “Caribbean” I am indentifying
principal participants in the financial services industry and am
referencing nations within CARICOM (Antigua and Barbuda, Barbados,
Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent
and the Grenadines, Trinidad and Tobago).

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billioninrevenueayear.23
Aprogressiontowardsenhancingthemonitoring
of transactional financial asset activity has been readily apparent since
1970 with the enactment and implementation of the Bank Secrecy Act
(31 U.S.C. 310) (BSA) which, among other things, required individuals
to report identities and relationships of parties involved in transactions
with foreign financial entities.24
Despite the BSA being in place for
approximatelyfortyyears(40)years,theaforementionedstatisticsillustrate
that tax evasion continues to be problematic worldwide, particularly in
the U.S., and previous attempts have been insufficient at combating it
using bilateral and multilateral information exchange agreements between
financial institutions and governmental tax authorities.
As previously mentioned, the U.S. has and continues to utilize
various bilateral tax information exchange agreements (TIEAs), double
tax conventions, and treaties to ascertain information regarding what
individuals or firms need to be investigated for tax evasion and which
require legal sanctioning or action.25
All of these agreements encompass
some form of informational reporting, whether it is by taxpayers or
third party organizations such as an FFI that relay tax information to
tax authorizes. A prime example of an unsuccessful usage of a treatise
has been the U.S. utilizing Mutual Legal Assistance Treaties (MLATs) to
identify individuals related to criminal transactions involving securities
or investment instruments; these are ineffective with Caribbean nations
23. Rambarran, supra note 20 (utilizing statistical support from a Tax Justice Network
study to illustrate his argument as to the reasoning why large, developed nations
want to impose strict compliance laws; see also Org. for Econ. Co-operation
and Dev., Promoting Transparency and Exchange of Information for Tax
Purposes: A Background Information Brief 2 (2010), available at http://
www.oecd.org/dataoecd/26/28/44431965.pdf; See also Dizdarevic, supra note 11,
at 2994.
24. 31 U.S.C.A. § 5311-30 (West). The Bank Secrecy Act has been the primary piece of
legislation directed towards anti-money laundering efforts prior to the enactment
of the FATCA provisions within the Hiring Incentives to Restore Employment
Act. Provisions within Title III of the Patriot Act (31 U.S.C. 5311–5330 and
31 CFR Chapter X) reflect the amended provisions pertaining to the Bank Secrecy
Act.
25. See generally Chad P. Ralston, Going It Alone: A Pragmatic Approach to Combating
Foreign-Effected Tax Evasion, 24 Emory Int’l L. Rev. 873 (2010). Prior to
the enactment of FATCA, Ralston provided a detailed synthesis of the issues
surrounding tax flight and tax evasion, while also providing suggestions as to future
strategies to use against foreign-effected tax evasion. Such strategies included

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because such treaties do not cover U.S. tax evasion.26
Despite this, there
have been instances in which Caribbean nations have been enticed to
enter other information exchange agreements via incentivized provisions
within legislation—a prime example is when provisions were enacted
to “liberaliz[e] foreign convention expense allowances for Bermuda
and Caribbean countries if the country had in effect a tax information
exchange agreement with the United States, Bermuda, the Bahamas,
and several other Caribbean countries entered into such agreements
with the United States.”27
There has been a call for the U.K. to adopt
and enforce more stringent tax evasion laws to enforce upon dependent
Caribbean nations28
; such an assertion caused one Caribbean dependency
to contemplate seeking independence.29
Caribbean nations have taken a
holistic approach towards complying with FATCA and negotiating with
the U.S; it has appointed a task force, headed by the Jamaican Central
Bank, to speak on its behalf on matters of legal obligations, compliance,
and assessing costs associated with maintaining a sufficient information
and technology system.30
The United States has approached the tax evasion quandary by
utilizing multilateral and bilateral treaties for information exchange
agreements, Qualified Intermediary (QIs) systems, and criminal activity
assistance treaties. This background section will provide a snapshot of
the landscape preceding the enactment of FATCA regarding tax evasion
monitoring systems; the pertinent provisions within FATCA that are
related to issues of confliction with local privacy and data retention
laws, along with overall compliance costs; and an overview of existing
26. Mutual Legal Assistance Treatises are used in the criminal context to provide a
shared exchange of information between foreign governments to assist in the
prosecution of crimes. The CARICOM version is available at http://www.caricom.
org/jsp/secretariat/legal_instruments/mutual_legal_assistance.pdf.
27. William L. Burke, Tax Information Reporting and Compliance in the Cross-Border
Context, 27 Va. Tax Rev. 399, 429 (2007).
28. See, e.g., Editors, Crown Dependencies: The Loophole Islands, The Guardian, June
28, 2012, http://www.theguardian.com/commentisfree/2012/jun/28/crown-
dependencies-loophole-islands-editorial.
29. Simon Bowers, Jersey Threatens to Break with UK overTax Backlash, The Guardian,
June 26, 2012, http://www.theguardian.com/uk/2012/jun/26/jersey-threatens-
independence-tax-backlash.
30. Zena Henry, FATCA 2013…Guyana Forging Ahead for Compliance, Kaieteur
News Online, Dec. 28, 2012, available at http://www.kaieteurnewsonline.
com/2012/12/28/fatca-2013-guyana-forging-ahead-for-compliance/.

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and emerging issues the Caribbean Community (CARICOM) may face
following the full implementation of FATCA.31
A. Landscape for Mechanisms to Combat Tax Evasion
Preceding FATCA
The ever evolving world of money laundering, fraud, and tax evasion
resulted in various different investment vehicles and platforms for
individuals ranging from single investors to hedge fund managers
to be able to avoid detection and obscure fraudulent activity. Prior to
FATCA, treaties and both bilateral and multilateral information exchange
agreements between the U.S. and other nations stipulated that the IRS
would need to request specific tax information about specific individuals
and/or accounts within a foreign bank or FFI operating within that
bank’s respective nation.32
Common characteristics of U.S. tax evasion
agreements and treaties have been identified as follows:
(1) a reduction in, or exemption from, tax on a reciprocal basis; the
country of source will usually cede jurisdiction (in whole or in part)
to the country of residence; (2) treaties seek to remove the possibility
of double taxation in order to reduce barriers to investment in the
United States by foreign country residents; and (3) the treaties make
procedures to improve the administration of tax laws, to settle tax
issues, and to provide for the exchange of information.33
The Qualified Intermediary (QI) system came into effect in 2001 and
has been the primary tax compliance system utilized by the U.S. pursuant
to complexities surrounding cross-border transactions by large and small
investment portfolios in the 1990’s.34
A QI is a foreign intermediary,
31. The subsequent section will only focus on the manners in which these tax
evasion systems have been implemented in relation to developing countries and
the Caribbean; the effectiveness of multilateral agreements versus bilateral or
automated information systems versus anonymous reporting are outside the scope
of this article.
32. See generally Richard E. Andersen, Analysis of U.S. Income Tax Treaties (RIA)
P24.01[1]; see also Dizdarevic, supra note 11, at 2982.
33. Dizdarevic, supra note 11, at 2994 (citing Paul R. McDaniel et al.,
Introduction to United States International Taxation 178 (5th ed. 2005).
34. ItaiGrinberg,BeyondFATCA:AnEvolutionaryMomentfortheInternationalTaxSystem,
(GeorgetownU.L.Ctr.,WorkingDraftofPaper,Jan.27,2012),http://scholarship.
law.georgetown.edu/cgi/viewcontent.cgi?article=1162&context=fwps_papers.; see
also William L. Burke, Tax Information Reporting and Compliance in the Cross-

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usually a foreign financial institution, that has entered into a withholding
and reporting agreement with the IRS.35
In order to adhere to existing
laws, a QI, typically an FFI, would have to determine the kind and
amount of income, apply treaty benefits, and then calculate, withhold,
and report these amounts to the IRS.36
Because of the dichotomy and
direct relationship with account holders, “QIs were seen as being in the
unique position to collect the appropriate information and help the
government achieve [financial account transparency].”37
Prior to 2001, FFIs had little interaction or correspondence with the
IRS or any other tax authoritative in which they would have to collect,
document, and file U.S. tax information, withhold U.S. tax allocated
to U.S. investors, or adhere to IRS oversight.38
As a result, two primary
problems arose: (1) a U.S. taxpayer could invest in U.S. source assets with
a FFI, but the FFI was not required to report anything to the IRS; (2)
U.S. withholding agents (e.g., U.S. banks) were not obtaining adequate
documentation from FFIs to document a reduced U.S. withholding
tax rate on payments to foreign customers of such FFIs. 39
This result
was expected considering “the FFI had the customer relationship, and
the U.S. withholding agent did not.”40
The QI program appeared to be
effective, “incentivizing banks to withhold and report accurate amounts
by allowing them to retain the privacy their clients so desired.”41
Despite
this, identified issues “were not adequately repaired in the [following
years], and abuses of the privacy incentive and the persistence of the
information gap paved the way for the current ‘crackdown’ on offshore
tax evasion.42
Border Context, 27 Va. Tav Rev. 399, 403 (2007).
35. (T.R. §1.1441-1(e)(5)(ii)); see also Dizdarevic, supra note 11, at 2978.
36. Dizdarevic, supra note 11, at 2979 (citing U.S. Gov’t Accountability Office,
GAO-08-99, Tax Compliance: Qualified Intermediary Program Provides
Some Assurance That Taxes on Foreign Investors Are Withheld and
Reported, but Can Be Improved 3, 10 (2007).
37. Id.
38. J. Richard (Dick) Harvey, Jr., Offshore Accounts: Insider’s Summary of Fatca and Its
Potential Future, 57 Vill. L. Rev. 471, 474 (2012).
39. Id.
40. Id.
41. Dizdarevic, supra note 11, at 2979-80.
42. Id.

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B. FATCA Programs
FATCA has three core elements to it: enhanced due diligence, information
reporting, and potential withholding on U.S. source payments.43
Because
a primary downfall of pre-FATCA enforcement was the insufficient ways
in detecting tax evasion, Congress chose to utilize “increased reporting
requirements that are designed to achieve a more integrated system of
information so evasion can be more readily ascertained.”44
Without
adequate knowledge or a basis of information as to what is pertinent
information to each prospective tax evader, the U.S. tax authorities
cannot know what information to specifically request.45
Accordingly,
one of FATCA’s primary goals is to aid in early detection of offshore tax
evasion.46
In doing so, along with aspirations towards providing more
financial transparency, the U.S. has implemented FATCA through “bold,
unilateral action.”47
Such action really only affects the nation in which the
FFI is unless there is an IGA that stipulates to reciprocity and exchange of
tax information with U.S. in order to avoid being deemed non-compliant
and being penalized.
The relevant issue with FATCA impacting Caribbean privacy and data
retention laws is the concept of Inter-Government Agreements (IGAs)
between FFIs and the U.S. that provide a government-to-government
framework utilizing an automatic information exchange system that has
a FFI report its FATCA information to its domestic government, who
in turn reports this information to the relevant tax authority—in the
context of this paper, this would be the IRS receiving tax reporting for an
FFI from the Cayman Islands.48
An IGA is not expressly legislated within
43. 26 U.S.C. §§1471-1474; see also FATCA Gaining Global Acceptance in Combatting
Tax Evasion (September 2013),CCH Federal Securities Law Reporter, Oct.
30, 2013, 2013 WL 6195564
44. U.S. Gov’t Accountability Office, GAO-08-99, Tax Compliance: Qualified
Intermediary Program Provides Some Assurance That Taxes on Foreign
Investors Are Withheld and Reported, but Can Be Improved 3 (2007);
Gary S. Wolfe, FATCA: Qualified Intermediary Reporting Requirements, IRS Tax
Audit News, July 23, 2010, http://gswlaw.com/irsblog/category/fatca/.
45. Id.
46. Dizdarevic, supra note 11, at 2984-85.
47. J. Richard (Dick) Harvey, Jr., supra note 38, at 472.
48. David Cohen, FATCA’s Impact on Caribbean Financial Businesses, KPMG IFC
Caribbean Rev. (2012), at 17, available at http://www.kpmg.com/KY/en/
services/Tax/Documents/FATCA-impact-on-the-caribbean-oct-2012.pdf.

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FATCA, but the interpretation of Title 26 of the United States Code
Section 1471 allows for an FFI to avoid penalization for non-compliance
by entering into an agreement to have intergovernmental reporting of its
FATCA information.49
Although in the infancy phase, IGAs have been
characterized as “facilitat[ing] the effective and efficient implementation
of FATCA by eliminating legal barriers to participation, reducing
administrative burdens, and ensuring the participation of all non-exempt
financial institutions in a partner jurisdiction.”50
Aside from the various
intricacies with classifying FFIs and whether they are compliant, IGAs are
in effect to avoid confliction with local privacy laws, and lessen the burden
of having smaller FFIs completely bear the excessive cost associated with
complying with FATCA in addition to existing treatises and qualified
intermediary agreements. In theory, by reporting FATCA information to
your home government, FFIs will be more proficient in complying with
its complex and intricate requirements.51
Two forms of IGAs have developed since 2012: Model I IGA and
Model II IGA. It is imperative to understand the key differences and how
they may affect a Caribbean nation. Within the context of this article,
the pertinent characteristics are as follows: the primary differences are
found within the reporting requirements and withholding concerns
related to account holders that are deemed recalcitrant. In terms of
reporting requirements, Model I IGA provides that an FFI will report
to their respective government, followed by an automatic exchange of
this information to the IRS.52
Conversely, Model II provides that an
FFI will report directly to the IRS and an exchange of this information
will only commence when there is a request by either partner country.53
Additionally, Model (I) will eliminate withholding tax on payments and
remove the necessity for an FFI to dissolve the relationship with an account
holder that is deemed recalcitrant.54
Similarly, Model II will have neither
a withholding tax on payments, nor a requirement to close accounts that
49. 26 U.S.C. § 1471(b).
50. See FATCA, supra note 43.
51. Id.
52. David Cohen, FATCA’s Impact on Caribbean Financial Businesses, KPMG IFC
Caribbean Review (2012), at 17, available at http://www.kpmg.com/KY/en/
services/Tax/Documents/FATCA-impact-on-the-caribbean-oct-2012.pdf.
53. Id.
54. Id.

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are deemed recalcitrant.55
Under FATCA, FFIs are required to receive
waivers of confidentiality from investors, but if local or national privacy
laws prevent an FFI from obtaining a waiver, the FFI must dissolve the
business relationship with the investor if they have not entered into an
IGA.56
Under Model I, in order to not violate local privacy laws, FFIs
must receive an account holder’s U.S. tax identification number, along
with written consent to send the information directly to the IRS no
matter what.57
It is well established that FATCA will adversely affect a broad
scope of individuals and entities as a result of the enforcement and
factors associated with implementation of the provisions stated above
and previously mentioned in terms of compliance requirements and
subsequent penalties. Another troublesome component in complying
with FATCA and its automatic information exchange system is the
concept of routing. Georgetown Law professor and legal commentator,
Itai Grinberg, astutely points out that:
FATCA’s routing system for reporting directly from financial
institutions to foreign sovereigns violates the local law of many
jurisdictions. It is therefore inappropriate for countries that are
cooperating with one another. However, requiring information
reporting directly from would-be-compliant financial institutions
located in nonparticipating jurisdictions pressures those jurisdictions
to cooperate. It also allows financial institutions that wish to cooperate
with new global norms to do so regardless of their government’s
policy decisions. Thus, FATCA’s routing system provides a useful
tool to elicit compliance from cooperative financial institutions in
jurisdictions that resist cooperating with a multilateral information
reporting regime, and to pressure those governments to cooperate.58
The principle derived from Grinberg’s observations and the aforemen-
tioned provisions of FATCA is the coercion and pervasive pressure that
FATCA and the U.S. imposes on foreign nations, particularly those who
have to violate locals norms and laws in order to cooperate or enter into
IGAs just to be able to avoid the 30% non-compliance penalization.
Finally, an additional problem arises when there are resident and
55. Id.
56. 26 U.S.C. § 1471(b)(1)(F); see also Cohen, supra note 48.
57. Id.
58. Grinberg supra note, at 58.

981
non-resident investors within this portfolios and the proper tax treatment
that is to be allocated to certain taxpayers with distinct and specific tax
characteristics, such as whether the non-U.S. investor is entitled to a
reduced withholding tax rate when it is difficult to ascertain their identity
or other financial activity, thereby, creating pressure to succumb to an
IGA or strictly comply with FATCA on your own accord. Scholars have
commented on the practicality and costliness of FATCA’s identification
system concluding that it is highly prescriptive; resulting in a customer
identification system that entails a costly implementation, particularly for
existing account holders, with little benefit being attributed to the local
government.59
Such concerns are supported by a comprehensive study
done on forty-six (46) benchmark-multinational organizations, research
was conducted to determine the cost of compliance and the statistical
implications that may result from compliance versus noncompliance in
the realm of data breach and privacy law.60
While the study found that
the cost of compliance is affected by organizational size, it is also affected
by the number of regulations and the amount of sensitive or confidential
information an organization is required to safeguard.61
Moreover, business
disruption and productivity losses are the most expensive consequences of
non-compliance; the least expensive consequences are fines, penalties and
other settlement costs.62
C. Critics of FATCA’s Compliance Costs and the
Potential Impact It May have on Caribbean Privacy Laws
and Data Protection Compliance
The collective cost associated with FATCA compliance to financial
institutions has been estimated at $8 billion a year, approximately ten
59. Grinberg supra note, at 59 (citing U.S.Treasury Notice 2010-60; Notice 2011-34);
see also Navigant report supra note, an existing account holder must be informed
that (1) aggregate information will be reported to the IRS; (2) such information
may give rise to a request of information on the account; (3) such information will
be going to the home country’s tax authority; and (4) the account holder’s FFI
home country may exchange this information with the IRS.
60. Ponemon Inst., LLP, The True Cost of Compliance: A Benchmark Study of
Multinational Organizations (2011), available at http://www.tripwire.com/
tripwire/assets/File/ponemon/True_Cost_of_Compliance_Report.pdf
61. Id. at 3-6.
62. Id.

982
times the amount of estimated revenue raised.63
This statistic is only
the tip of the iceberg in the critique of FATCA and its imposing nature
upon foreign nations. Caribbean leaders have expressed mixed sentiments
regarding the pervasive nature of FATCA and whether they will be able to
sufficiently comply, either with or without an IGA. In 2012, Governor
of the Central Bank of Trinidad & Tobago, Jwala Rambarran, articulated
growing concerns in his speech to the Council of Securities Regulators
of the Americas (COSRA) regarding privacy laws and the necessity to
align with powerful nations such as China to amplify such concerns
through an influential member of global financial committees in order
to avoid the adverse effects that will culminate upon Caribbean nations
when FATCA is in full swing.64
Substantive implications are that FFIs are
not relieved of the burden of reporting and due diligence process when
having no U.S. stakeholders; they will likely have the inability to operate
profitably without claiming FFI status and satisfying requirements of
implementing internal policies, procedures and controls around U.S.
accounts; the burden to identify and classify each and every business
within a large network of FFIs; and the potential of deteriorating the
relationship between investors and banks due to increased concerns
regarding privacy and confidentiality.65
The holistic feared effects are
the deprivation of sovereignty through American financial imperialism,
the forced incorporation of foreign law via treaty or agreement, and
minimal power to contest and/or reject FATCA. Despite these concerns,
Rambarran recognized the benefits associated with entering into an IGA
and concluded that Trinidad & Tobago was equipped with the resources
and tools to comply with FATCA.66
There are active discussions as to what tax-evasion detection programs
and systems are most effective and pragmatic, however, the lack of
financial support and confliction of local privacy laws impede a developing
nation’s ability to create and maintain an adequate FATCA compliance
63. Robert W. Wood, FATCA Carries Fat Price Tag, Forbes.com, (Nov. 30, 2011),
http://www.forbes.com/sites/robertwood/2011/11/30/fatca-carries-fat-price-tag/.
64. Rambarran, supra note 20.
65. Cohen, supra note 48; see also H. Wayne Lovell, Overview of FATCA and Its
Implications on Caribbean States (Oct. 30, 2012), http://www.carib-export.com/
login/wp-content/uploads/2012/11/Overview-of-FATCA-and-its-Implications-
on-Caribbean-States-H.-Wayne-Lovell.pdf.
66. Id.

983
program.67
This tension between utilizing an automated information
reporting system versus an anonymous reporting system takes center stage
in underdeveloped nations, such as those in the Caribbean because of
the excessive operational cost associated with privacy and data retention
compliance. Within the financial services community, there have been
strong assertions by the onshore jurisdictions, such as the U.S., U.K., and
France, that offshore financial centers (OFCs) have lenient and ineffective
regulatory oversight that perpetuates fraud, tax evasion and criminal
activity.68
Despite these largely held beliefs, there are misconceptions
associated with such financial regulatory critiques of OFCs, particularly
those within the Commonwealth Caribbean.69
A recent 2013 fully
comprehensive study conducted by Andrew Morriss and Clifford Henson
strongly argue, with sufficient evidence, that “based on both quantitative
input measures and a qualitative assessment, the [critiques by onshore
jurisdictions] of OFCs as bastions of laxity” is an inaccurate assertion.70
Moriss and Henson utilized a multitude of variables to measure
effectiveness of financial services regulation for cross-jurisdictional systems
and concluded that the majority of Caribbean nations have effective
regulation programs when assessing the qualitative output of programs,
rather than just quantitative inputs (number of staff, amount of money
allocated to resources, amount of regulators in comparison to population
of financial institutions).71
This study will be further elaborated upon in
the subsequent section to support the component of my solution to allow
offshore jurisdictions more autonomy as long as it is practical for the
offshore center to do so under the legal landscape.
III. DISCUSSION & ANALYSIS
As noted by Professor Itai Grinberg, it is readily apparent that developed
nations, such as the U.S., are addressing the tax evasion dilemma by
asserting that financial institutions, both domestic and foreign, act as tax
67. Grinberg, supra note 34.
68. Andrew P. Morriss & Clifford C. Henson, Regulatory Effectiveness & Offshore
Financial Centers, 53 Va. J. Int’l L. 417, 430 (2013).
69. Id. at 417, 418-20.
70. Id.
71. Id.

984
intermediaries with respect to offshore accounts.72
Whether countries
enact and enforce qualified intermediary systems, bilateral or multilateral
information exchange agreements, unilateral information exchange
agreements, or tax information exchange agreements, Caribbean nations
will have to combat the assertion that they are tax havens to which foreign
investors are fraudulently using the financial services system and there
needs to be legislation to compel Caribbean FFIs to adhere to outside laws.
Both dependent and independent Caribbean nations face substantive
and holistic concerns by the implementation and enforcement of FATCA
and the accompanying non-compliance penalties, costs and resources
allocated towards reporting, and the imperialistic approach imposed by
the United States. As of August 2013, the Caribbean region has elected
to take a regional approach in evaluating FATCA.73
It was determined
at a meeting of the Council for Finance and Planning (COFAP) of the
CARICOM, however, it was not disclosed as to what this approach will
entail, but recent IGA agreements by Costa Rica and the Cayman Islands
may reflect the direction for the near future.
My proposed solution is not universal for all Caribbean nations, as
each territory has distinct norms and philosophies, along with different
economic concerns. Because of FATCA being in the infancy phase,
my solution is more preventive in nature considering the harsh non-
compliance penalties with FATCA being, among other penalties, a 30%
deduction and withholding of payments against the FFI. Initially, I
propose for CARICOM and remaining Caribbean nations to identify
the strength of their exiting tax information exchange agreements, double
taxation agreements, and qualified intermediary agreements to ascertain
whether they are sufficient in protecting their local privacy laws to further
enable their place in the financial services market by protecting the
sought after confidentiality for two reasons: 1. avoid violating domestic
privacy rights; and 2. avoid creating risk averse clients that will withdraw
substantial assets due to an unstable compliance landscape. Following
this, it is difficult to argue against the usage of an IGA because the
benefits associated with entering one in theory are the avoidance of legal
72. Grinberg, supra note 34, at 4.
73. Jim Calvin, CARICOM Announces Agreement on a Regional Approach to FATC,
FSI Tax Post, Aug. 7, 2013, http://www.fsitaxposts.com/2013/08/12/caricom-
announces-agreement-regional-approach-fatca/.

985
impediments to compliance, simplifying practical implementation, and
reducing compliance costs.74
If it is inevitable that you will succumb to
pressure and coercion, you will want to mitigate your costs and maintain a
level of economic sovereignty considering the financial services sector has
been a primary source of income for Caribbean nations since the latter half
of the Twentieth Century. Accordingly, a Model II would be most optimal
for many Caribbean nations because of the avoidance of substantial
compliance costs associated with Model I considering Model I imposes a
heavy burden upon governments to maintain an information technology
system in order to initially gather, store, and relay tax information from
all FFIs within the country. Additionally, despite adherence to reporting
requirements, Model II would help preserve some allotment of client
privacy to mitigate the incentive for client-investors to remove their U.S.
assets and violation of local privacy laws—all of which are in conjunction
with Caribbean nations having effective cross-jurisdictional compliance
programs.75
The IGA was introduced to combat conflicts with local
privacy laws by allowing for the tax information exchange to go through
a domestic governmental tax authority that will subsequently send this
information to the IRS, rather than having the FFI or individual send
their confidential information directly to the IRS. This plays into the
notion that the most expensive non-compliance costs are those in which
there is a business disruption arising from unstable markets or high risk
banking activity and it is most beneficial to avoid such costs through the
most cost effective compliance program. By utilizing a Model II IGA,
FFIs can mitigate compliance costs associated with complex reporting by
directly sending the FATCA information to the IRS.
Although there is a need to maintain a degree of sovereignty, the
contemplation and threat to seek independence, as the dependent nation
of Jersey had in 2012, is not an effective way to combat egregious and
pervasive laws like FATCA from being imposed considering the recent
movement by well established Caribbean nations towards signing IGAs
with the U.S. In November of 2013, the Cayman Islands and Costa
74. Paul Eldridge, The FATCA Challenge Facing Caribbean Banks,
May 18, 2012, available at http://www.pwc.com/jm/en/fatca/pdf/
TheFATCAChallengeFacingCaribbeanBanksv8.1.pdf.
75. See supra Section II Morris and Henson study.

986
Rica became two (2) of twelve (12) nations to sign an IGA.76
Costa Rica
signed a Model IA IGA, meaning the exchange of tax information will
be reciprocal and the U.S. will also provide tax information to the Costa
Rican government regarding Costa Rican individuals with accounts in the
United States.77
The Cayman Islands signed a Model I (B) IGA, meaning
FFIs in the Cayman Islands are required to report the tax authority in the
Cayman Islands, who will then relay the tax information to the IRS.78
It is apparent that the Caribbean is slowly succumbing to the pressure,
as illustrated by one of its most powerful financial services provider, the
Cayman Islands, entering into an IGA before FACTA became effective;
because of this, it can be inferred that either many Caribbean nations do
not have the resources or power to either comply with FATCA without
entering an agreement of some sort or afford the colossal costs enforced
for non-compliance or the aforementioned benefits in entering an IGA
exceed the privacy rights and economic sovereignty.
A. Incorporation of Foreign Laws through Agreements
and Treaties
When Caribbean nations enter into an international treaty with a foreign
country or entity, it implements the pertinent law(s) and may ensure that
it is enforceable under local law to harmonize the international law within
the legal framework of domestic law.79
Some treaties and agreements
require this integration in order to be enforceable.80
The process by which a
statue is enacted to do so is called “incorporation.”81
Despite incorporation
existing in the Caribbean, there are challenges to the incorporation and
acceptance of international law that conflicts, undermines, or impedes
the functioning of existing law. A prime example of this and the concerns
expressed by Caribbean financial ministers in 2012 is illustrated in Chile
76. Robert Wood, Caymans & Costa Rica Sign U.S. Tax Evasion Pact: FATCA
Gets Even Fatter, Forbes, Nov. 29, 2013, http://www.forbes.com/sites/
robertwood/2013/11/29/caymans-costa-rica-sign-u-s-tax-evasion-pact-fatca-gets-
even-fatter/.
77. Id.
78. Id.
79. Rose-Marie Belle Antoine, Commonwealth Caribbean: Law and Legal
Systems 232 ( 2nd ed. 2008)
80. Id.
81. Id.

987
recently contesting that they have to enter into an IGA.82
Chile refuses to
do so based on the premise that not only does FATCA and an IGA violate
their local privacy laws, but in order for them to alter the domestic law to
adhere to FATCA, it would have to have Congress approve and authorize
it.83
Additionally, neither regulation nor a tax treaty with another country
can authorize such a change in domestic law regarding privacy rights.84
Professor Grinberg asserted that in arguing a violation of privacy
laws, it must be unsuccessfully argued that: “(1) that bank secrecy vis-
à-vis tax administrations is part and parcel of a basic right to privacy,
and that the information reporting/information availability model for tax
enforcement in almost every major developed economy is thus unjust;
(2) that individuals who have the wherewithal and sophistication to bank
internationally should have access to elective bank secrecy, or (3) that
bank secrecy needs to be preserved vis-à-vis authoritarian and corrupt
regimes.”85
I do not contest her rationale for defeating such arguments;
however, the notion that a nation has existing law relating to the repeal,
incorporation, or conflict of international law with domestic law is a
valid concern that arises from conflict with local privacy law or any law
for that matter. Although no legal action has commenced and Chile is
not a Caribbean nation, its situation illustrates the dichotomy between
the processes of amending or creating domestic law that is in violation
82. Dan Macy, FATCA Backlash from Abroad over Privacy Concerns, Competitiveness,
Thompson News Service, June 28, 2013, http://www.thompson.com/public/
newsbrief.jsp?id=3998.
83. Id.
84. Id.
85. Grinberg, supra note 34, at fn. 103. Grinberg explained why each argument
would fail in stating:
the first of these arguments rejects long-standing legal and policy notions
in every major developed economy that tax administration access to
resident taxpayer financial information is consistent with a taxpayer’s
reasonable expectations of privacy; the second argument is entirely
untenable; there is no credible basis for arguing that having sufficient
wealth or sophistication to access offshore banking should give an
individual the right to bank secrecy; The third argument conflates the idea
that the benefits of a multilateral information exchange system should not
be extended to all governments with the proposition that any individual,
regardless of whether they reside in a just or unjust, democratic or
undemocratic, or morally legitimate or illegitimate state, should have the
option to individually elect to securely evade their taxes.

988
of existing privacy rights, and the dilemma created when a treaty is not
incorporated. If it were a Caribbean nation, my preventive approach
within my solution in this context would be to utilize the IGA Model
II despite contention against incorporating international law because if
domestic law requires proper amending or repealing of vested privacy
rights, you can insulate yourself with IGA from penalties while contesting
the issue.
B. Statistical Data Reflects Effective Regulation
Approaches in Caribbean
As illustrated by the effectiveness of regulatory schemes study conducted
by Moriss and Henson, there are misconceptions as to the regulatory
landscape and enforcement within the Caribbean. Pertinent conclusions
derived from statistical findings reflected in the study included: (1) a key
factor in OFCs’ ability to provide effective competition is their ability to
regulate their financial industries by using methods that differ from those
used by onshore jurisdictions. . . . This mere difference in approach does
not justify a conclusion that the difference reflects laxness toward criminal
activity, money laundering . . . or tax evasion;86
(2) high level Caribbean
financial sector regulators were vastly more impressive from an experience
and sophistication standpoint compared to the highly populated financial
sector states such as Delaware;87
and (3) although every jurisdiction is
free to set their tax policy and serve their own objectives and agenda, this
“freedom is limited by the reciprocal freedom of other jurisdictions to set
their own policies as well.”88
Moriss and Henson determined that the appropriate measure to
address the question of whether a government can participate in the
global market, but also use indirect means to serve their own tax policy
objectives, “is through the normal interactions among jurisdictions
in international fora where all are represented, or through bilateral
negotiations in the context of settled international law principles, not
by pretending the issue is something other than what it is.”89
Given the
86. Morriss & Henson, supra note 68, at 427.
87. Id. at 448.
88. Id. at 457.
89. Id.

989
empirical data is not effectively refuted, offshore jurisdictions, particularly
those within the Caribbean, have support for maintaining their existing
regulatory practices regarding tax evasion. Additionally, the notion of
utilizing behavioral aspects of compliance in determining an effective
policy is a strong argument in contesting the Because the proposed
solution encompasses embracing the concept of entering an IGA, with
or without existing tax information exchange agreements, this bilateral
IGA agreement provides the platform for benefitting from likely avoiding
violating local privacy concerns for the time being, while conducting
business in a efficient business manner considering studies have shown that
multinational companies incur the largest losses in business disruption
based on non-compliance, whereas the least expensive consequences were
from penalties, sanctions and fines.90
C. Critics of Caribbean Nations Utilizing
Intergovernmental Agreements
Critics of a solution that is passive-aggressive in adhering to pervasive
international laws relating to financial penalties for non-compliance
entailing the distribution of private financial information may contend
that if FATCA were applied too broadly or severely, investors may leave
the market out of fear that their privacy will be violated and that financial
institutions may have to withhold up to 30% of their assets if they are
found to be recalcitrant accounts under the law, therefore, why invest
my money into a country or FFI that is at risk of an excessive penalty.
As noted throughout this paper, there is an established trend towards
using FFIs as cross-border intermediaries for tax evasion purposes
and statistics illustrate that Caribbean nations are not at more risk for
financial sanctioning. Moreover, by cooperating with FATCA, emerging
markets may be positioning themselves to benefit more from bilateral and
multilateral free trade agreements that may result in benefits including
higher performing markets and more effective and reliable channels for
identifying tax evasion. Another very identifiable concern a critic may
argue is the concept of reciprocity with the U.S. and implications arising
from this dynamic.
90. See supra Section II for Comprehensive Study on the Cost of Compliance of
Multinational Companies enaged in privacy and data retention.

990
A follow up to the implications of FATCA, my solution resulting in
insulation of privacy rights while retaining the ability contest violations
of domestic law, would be the overall benefit derived from entering an
IGA, avoiding non-compliance costs and violation of privacy rights
when Caribbean nations would rather unify to contest the incorporation
of laws that violate domestic privacy issues. In furtherance, how would
the violation of privacy rights impede further tax evasion legislation that
imposes coercion tactics through strict penalization for non-compliance.
IV. CONCLUSION
The growing concept of financial institutions operating as active cross-
border “tax intermediaries” is one of the underlying principles for
more aggressive and multinational legislation; however, there is the
potential for substantial ramifications and externalities, both in the legal
and economic arenas, that may derive from FATCA and subsequent
legislation.91
Pursuant to this determination that FFIs are being utilized
and called upon to implement more effective automated tax information
exchanges with domestic and international tax authorities, the issue for
underdeveloped Caribbean nations is finding a method to operate in the
most cost effective manner without violating domestic laws and existing
treaties. This can also be beneficial towards maintaining some form of
economic sovereignty. The most optimal method in doing so is identifying
the extent that existing treaties and/or agreements provide guidance as to
how FFIs can operate in an automated information exchange because
of the colossal implementation and operational information technology
costs that are associated with complex compliance reporting of private
data. Once potential problems are identified, the most logical step is
to determine how to enter an IGA that promotes economic stability,
privacy considerations, compliance cost avoidance, and mitigating any
business disruptions that can potentially exceed any penalty or fine under
FATCA. The Caribbean nations have demonstrated a more sophisticated
and effective cross-jurisdictional compliance platform than prevailing
perspective of their financial services regulatory scheme; however,
91. Grinberg, supra note 34; see also supra Sections II and III.

991
the implementation of FATCA is the most pervasive and imposing
legislative act yet for tax evasion and the ability to utilize the IGA system
for preventive measures in all facets of compliance is most practical in
considering this emerging and early phase of FATCA’s unilateral rather
than bilateral approach.

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