U.S. Sen. Ron Wyden (D-OR), chair of the Senate Finance Committee, released the findings of a year-long investigation into what he called the largest alleged individual tax evasion scheme in U.S. history.
Wyden said the investigation uncovered the “shell bank” loophole in the Foreign Account Tax Compliance Act (FATCA). This loophole allows offshore banks to accept funds from U.S. persons without reporting them to the Internal Revenue Service (IRS). Wyden alleges that the loophole was used by billionaire Robert Brockman and his associates to turn their shell companies into financial institutions that could self-certify to the IRS reporting of their offshore accounts. This exempted Swiss banks Mirabaud and Syz from FATCA reporting requirements, thus allowing Brockman to evade taxes on over $2 billion in income.
“The Finance Committee has uncovered a glaring loophole in one of our most important tools in the fight against offshore tax evasion,” Wyden said on Aug. 24. “With little effort, wealthy tax cheats like Robert Brockman are able to convert shell companies into shell banks, and self-certify they are reporting income held in offshore accounts to the IRS. Foreign banks in Switzerland and the Cayman Islands are then exempt from complying with basic FATCA requirements to identify and report U.S. accounts. There are hundreds of thousands of shell companies in offshore tax havens that have been turned into IRS-approved banks with virtually no scrutiny by the IRS. It doesn’t take a rocket scientist to see how this loophole leads to billions in tax evasion, particularly after Republicans’ decade-long campaign to gut the IRS.”
Wyden said funding for IRS enforcement in the Inflation Reduction Act should focus on increasing scrutiny of partnerships like the ones Brockman used to evade taxes on $2 billion in income, adding that he is working on writing legislation to close that loophole.
The investigation found the process to obtain an IRS GIIN (Global Intermediary Identification Number) to be alarmingly simple. A shell company submits the short IRS form 8957, or registers via an online portal. Applications to obtain a GIIN number and become a foreign financial institution under FATCA are nearly always approved without meaningful review by IRS personnel, Wyden stated. Also, IRS representatives told committee staff that it does not contact the financial institution’s FATCA Responsible Officer prior to issuance of the GIIN. The IRS also does not ask questions about the entity’s assets, source of funds or wealth, beneficial ownership, or business and investment activities.
Wyden and investigators said there are hundreds of thousands of possible shell banks in offshore tax haven jurisdictions. In the eight countries where entities linked to Brockman were established, there are more than 128,000 entities registered with the IRS as financial institutions under FATCA. In just the Cayman Islands alone, there are more than 84,000 IRS-approved financial institutions. The senator added that the failure to audit large partnerships allows for proceeds from U.S. investment activity to be illicitly sent offshore.
Due to budget cuts, the IRS does not have the personnel or capabilities to adequately monitor whether these offshore entities are properly reporting accounts belonging to U.S. persons. Wyden said the $80 billion in funding for the IRS in the Inflation Reduction Act should be used to address this problem.