Many countries are known as tax havens for their banking policies. For example one third of all worldwide funds held outside the country of origin reside in Switzerland. Switzerland highly values the right to privacy, and this is reflected in their laws, especially banking laws. Under Swiss privacy laws banking information is confidential, generally the only information that can be released about a bank account there is the name and identity of the account holder.
Although, there are many exceptions to this rule of banking privacy in Swiss and other accounts. When an entitiy with a Swiss bank account has a criminal investigation pending, the bank may have to reveal information. Although, foreign banks might not necessarily comply with U.S. orders because they would not technically incur any monetary penalties for failing to comply with a U.S. court order.
Some other banking havens include Monaco and Lebanon. Lebanon in particular has been an important banking center in the Middle East.
In recent year however, these foreign banks have come under increasing pressure to comply with criminal investigations and lift the amount of secrecy they give their clients.
For example, in 2010 Congress passed the Foreign Account Tax Compliance Act (FATCA). This act will require foreign banks to gather information and report it to the account holders starting next year. Once in the hands of account holders the IRS can demand that the account holders provide the IRS with the information regarding the bank account.
As mentioned above, foreign banks will often refuse to comply with U.S. orders because banks in countries like Switzerland, Monaco, and Lebanon are not governed by U.S. law. However, the U.S. government has the power to prevent deposits or transfers in and out of U.S. accounts into foreign accounts.
The U.S government can also blacklist foreign banks, which makes it more difficult for U.S. organizations to conduct business with them. As a result foreign banks either must accept the new regulation or stop taking deposits from organizations and individuals in the U.S. Many foreign banks have stopped taking deposits from American clients for this reason.
Lebanon’s central bank stated recently that it would cooperate with the new regulation. Lebanese banks are now requiring U.S. account holders to authorize the release of information to the IRS or face account closure and a report to the IRS. This second action could have grave consequences for some account holders.
Filing a Report of Foreign Bank and Financial Account is required annually. However, organizations seeking to shelter assets from the IRS in Lebanese bank accounts typically fail to file these reports, possibly for reason other than tax evasion. If a Lebanese bank contacts the IRS about a U.S. entity’s refusal to authorize information release the IRS could launch an investigation.
Willful failure to file an FBAR carries stiff penalties including jail time and fines of $100,000 or more for each year the account is not reported. Although, a foreign account holder may be able to avoid this if the failure to report was unintentional. In other cases the individual could negotiate with the IRS to pay a lesser onetime penalty.
The deadline to file this year’s FBAR is June 30, 2012.