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Archive for August, 2009

OECD MODEL AGREEMENT FOR TAX INFORMATION EXCHANGE (TIEA) PART 1

Posted by William Byrnes on August 29, 2009


This week we continue with our examination of Cross-Border Information Exchange deciphering the procedural and substantive requirements of exchange contemplated by the OECD Model Agreement for Tax Information Exchange.  The other important issue of Cross Border Assistance with Tax Collection will be addressed in a few weeks. 

In the 15 week online International Tax courses starting September 14, we will be undertaking an in-depth analysis of the topics covered in this blog during the 10 online interactive webinars each week.

2003 OECD Model Agreement for Tax Information Exchange (TIEA)

The OECD Model TIEA was developed by an OECD Working Group consisting of the OECD Members and delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino.  The OECD Model TIEA obviates from several principles established in the 2003 OECD Model DTA, 2001 UN Model, 1981 OECD Convention on Tax Claims and 1988 OECD Convention on Administrative Assistance.

The Model TIEA provides that the Parties shall give “information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.”  The Model TIEA allows for a two year phase between information sought in criminal tax matters, i.e. criminal tax evasion, versus the later extension to information sought in civil tax matters i.e. civil tax evasion but importantly also tax avoidance.   

The TIEA obviates from the traditional requirement of dual criminality, that is the underlying crime for which information is sought should be a crime in both Parties’ domestic laws: “Such information shall be exchanged without regard to whether the conduct being investigated would constitute a crime under the laws of the requested Party if such conduct occurred in the requested Party.”

Because the OECD Model TIEA is meant to be applied to negotiations with jurisdictions that do not have a direct tax system, the TIEA provides that the Requested Party must seek requested information even when it does not need the information for its own tax purposes.  But a Requested State is not obliged to exceed the power to gather information that is allowable under its laws.  However, the TIEA is specific that each Party is obliged to provide:

“a) information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees;

b) information regarding the ownership of companies, partnerships, trusts, foundations, “Anstalten” and other persons,…ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and in the case of foundations, information on founders, members of the foundation council and beneficiaries….”

Procedurally, the Requesting State’s competent authority must provide, in order to “demonstrate the foreseeable relevance of the information to the request” the following information:

“(a) the identity of the person under examination or investigation;

(b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;

(c) the tax purpose for which the information is sought;

(d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information;

(f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;

(g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.”

US TIEAs Coming into Effect since 2001

  • Barbados, 3 November 1984
  • Bermuda, 11 July 1986
  • Cayman Islands, 27 November 2001
  • Antigua & Barbuda, 6 December 2001
  • Bahamas, 25 January 2002
  • BVI, 3 April 2002
  • Netherlands Antilles, 17 April 2002
  • Guernsey, 19 September 2002
  • Isle of Man, 3 October 2002
  • Jersey, 4 November 2002
  • Aruba,  13 September 2004
  • Brazil, pending
  • Liechtenstein, pending

The BVI and Cayman TIEAs are nearly duplicate.

Tax Covered

The BVI and Cayman Islands TIEAs scope is limited to collecting information for issues of US federal “income” tax.[1]  For more broad in scope are the Isle of Man (“IOM”)[2], Jersey[3], The Bahamas[4] and Netherlands Antilles[5] (“NLA”) TIEAs that apply to “all federal taxes”, thus by example encompassing federal estate tax, federal gift tax, federal social security tax,  federal self employment tax and federal excise tax.  The Barbados[6] and Bermuda[7] TIEAs apply to the specific federal taxes previously listed, which has the same broad affect as The Bahamas and NLA TIEAs.

Scope of Information

The BVI and Cayman TIEAs scope of information includes that “relevant to the determination, assessment, verification, enforcement or collection of tax claims with respect to persons subject to such taxes, or to the investigation or prosecution of criminal tax evasion in relation to such persons.”  The IOM, Jersey, Bahamas, NLA and Bermuda TIEAs provide that information means any fact or statement, in any form, by example an individual’s testimony or documents, that is foreseeably relevant or material to United States federal tax administration and enforcement.  The Barbados TIEA provides more generally for the exchange of information to administer and enforce the TIEA listed taxes covered within the scope.

Jurisdiction : Parties and Information Subject to Requests

The BVI, Cayman, IOM, Jersey, and NLA TIEAs do not limit the scope of the request to parties that are nationals or resident in BVI and Caymans, but rather allow a request for information as long as either the information is within the jurisdiction or is in the possession of, or controlled by, a party within the jurisdiction.  The Bahamas treaty does not address this jurisdictional issue directly but probably will result in the same application.  The Barbados TIEA also does not limit the scope of the request to resident parties.  The Bermuda TIEA, when the information is sought about a non-resident of both jurisdictions, requires that the requesting party establish the necessity of the information for the proper administration and enforcement of its tax law.

Notice to Taxpayer of Request

The TIEAs do not address the issue, however the TIEAs require that enabling legislation be enacted to ensure the carrying out of the TIEAs obligations.  BVI may include in its enabling legislation that the taxpayer must receive notice that a TIEA request has been made targeting the taxpayer.  The Government of Switzerland, in its public statements regarding the turning over information including bank records for approximately 5,000 accounts UBS settlement with the US IRS, stated that it will post notices to the UBS account holding US taxpayers whose information has been disclosed via the tax treaty between the US and Switzerland.  The IRS has in turn said that these Swiss notices will not service a notice for IRS purposes that these (alleged) tax evaders may still, if not under current audit for this non-disclosure, may still quickly take advantage of the reduced civil penalty and elimination of criminal penalty amnesty.

Check back for Part 2 on Wednesday, September 2.  Prof. William Byrnes


[1] Agreement Between The Government Of The United States Of America And The Government Of The United Kingdom Of Great Britain And Northern Ireland, Including The Government Of The British Virgin Islands, For The Exchange Of Information Relating To Taxes, Article 1 (BVI TIEA”; Agreement Between The Government Of The United States Of America And The Government Of The United Kingdom Of Great Britain And Northern Ireland, Including The Government Of The Cayman Islands, For The Exchange Of Information Relating To Taxes, Article 1 (“CI TIEA”).

[2] Agreement Between The Government Of The United States Of America And The Government Of The Isle of Man For The Exchange Of Information Relating To Taxes, Art. 3.

[3] Agreement Between The Government Of The United States Of America And The Government Of The States Of Jersey For The Exchange Of Information Relating To Taxes, Art. 3.

[4] Agreement Between The Government Of The United States Of America And The Government Of The Commonwealth Of The Bahamas For The Provision Of Information With Respect To Taxes And For Other Matters, Article 1 d).

[5] Agreement Between The Government Of The United States Of America And The Government Of The Kingdom Of The Netherlands In Respect Of The Netherlands Antilles For The Exchange Of Information With Respect To Taxes, Article 3 f).

[6] Agreement Between The Government Of The United States Of America And The Government Of Barbados For The Exchange Of Information With Respect To Taxes, Article 3.

[7] Agreement Between The Government Of The United States Of America And The Government Of The United Kingdom Of Great Britain And Northern Ireland (On Behalf Of The Government Of Bermuda) For The Exchange Of Information With Respect To Taxes, Article 2 i).

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Cross-Border Information Exchange part 2

Posted by William Byrnes on August 26, 2009


This week we continue with our examination of Cross-Border Information Exchange, primarily due to the press about the UBS settlement and the soon turning over of approximately 5,000 tax-evading US account holders.  Information Exchange is of course one aspect of cross-border cooperation.  Another important aspect is Cross Border Assistance with Tax Collection which we will address within the next two weeks.

2001 UN Model DTA – Tax Information Exchange (Art. 26)

The United Nations Model is similar in scope to the OECD model displayed in my previous blogticle.  However, the UN Model defines the type of information and methodology of investigative exchange as regards the requesting state having access to cross border corporate records, though under the OECD Model such information may also be sought and methodology used.

Agreement Among The Governments Of The Member States Of The Caribbean Community For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income, Profits, Or Gains And Capital Gains And For The Encouragement Of Regional Trade And Investment

Article 24: Exchange of Information

     1. The competent authorities of the Member States shall exchange such information as is necessary for the carrying out of this Agreement and of the domestic laws of the Member States concerning taxes covered by this Agreement in so far as the taxation thereunder is in accordance with this Agreement. Any information so exchanged shall be treated as secret and shall only be disclosed to persons or authorities including Courts and other administrative bodies concerned with the assessment or collection of the taxes which are the subject of this Agreement. Such persons or authorities shall use the information only for such purposes and may disclose the information in public court proceedings or judicial decisions.

      2. In no case shall the provisions of paragraph 1 be construed so as to impose on one of the Member States the obligation:

           (a) to carry out administrative measures at variance with the laws or the administrative practice of that or/of the other Member States;

           (b) to supply particulars which are not obtainable under the laws or in the normal course of the administration of that or of the other Member States;

           (c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process the disclosure of which would be contrary to public policy.

2000 Improving Access to Bank Information for Tax Purposes (OECD)

In 2000, the OECD issued Improving Access to Bank Information for Tax Purposes.  The 2000 OECD Report acknowledged that banking secrecy is “widely recognised as playing a legitimate role in protecting the confidentiality of the financial affairs of individuals and legal entities”.  This Report focused on improving exchange of information pursuant to a specific request for information related to a particular taxpayer.  In this regard, it noted that pursuant to its 1998 (OECD) Report, 32 jurisdictions had already made political commitments to engage in effective exchange of information for criminal tax matters for tax periods starting from 1 January 2004 and for civil tax matters for tax periods starting from 2006. 

 A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard

 When we examine TIEAs, we will also look at the most recent OECD update A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard issued August 25, 2009 (see http://www.oecd.org/dataoecd/50/0/42704399.pdf). The exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes is the standard the OECD developed in co-operation with non-OECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting.  

The OECD claims that the confidentiality of the information exchanged will be protected by the recipient jurisdiction though at this time no measures have been announced to assess any safeguards should such be established.

2003 EU-US Agreements for Mutual Legal Assistance

On 25 June 2003 the US and EU signed an agreement, applying to all EU member States, for Mutual Legal Assistance.[1]  The EU-US MLA and Extradition Agreements (see my blogticle wherein I will address Extradition Agreements) do not currently extend to the United Kingdom’s Overseas Territories.  Article 16 (1)(b) of the MLA agreement enables the agreement to apply to Overseas Territories of EU member States but only where this is agreed by exchange of diplomatic note, so it is not automatic.  

The agreement’s purpose is to assist a requesting state to prosecute offences through cooperation of another State or jurisdiction in obtaining cross-border information and evidence.  This Agreement applies to tax matters involving criminal tax evasion.  This Agreement could widen the scope of financial institution and professional service provider information allowed to be requested specifically with regard to the financial information covered below.

Any party to the Agreement is required pursuant to the request to provide information regarding whether its banks, other financial institutions and non-bank institutions[2] within its jurisdiction possess information on accounts and financial transactions unrelated to accounts regarding targeted natural or legal persons.  The Agreement specifically excludes banking secrecy as a defense for non-compliance.  In order to receive banking or financial information from a financial institution or non-financial institution, the requesting State must provide the competent authority of the other State with: 

  • the natural or legal person’s identity relevant to locating the accounts or transactions;
  • information regarding the bank/s or non-bank financial institution/s that may be involved, to the extent such information is available, in order to avoid fishing expeditions; and
  • sufficient information to enable that competent authority:  
  •     to reasonably suspect that the target concerned has engaged in a criminal offence;
  •     to reasonably expect that the bank/s or non-bank financial institution/s of the requested state may have the information requested; and
  •     to reasonably expect that there is a nexus between the information requested and the offence.

 This multi-lateral MLAT Agreement, unlike TIEAs that have developed since 2001, contains a dual criminality requirement, but it applies retroactively to offences committed before the Agreement’s entry into force date, Article 12-(1) provides for this.  Criminal tax fraud is an underlying crime for purposes of the offence of money laundering. Thus, this Agreement probably will allow any party to the Agreement to seek financial information from another State regarding a specific taxpayer’s criminal tax fraud for offences committed before the tax year beginning  January 1, 2004.  The retroactive provision in Article 12(1) may run counter to a fundamental principle of criminal law in that a person cannot criminally suffer for an act or conduct which was not an offence at the time the act was committed or conduct took place.  Whether these MLAT agreements establish a situation of retroactive criminal application may eventually be addressed as a human rights issue.

 Tax Treaties course

 In the Tax Treaties course starting in September, Prof. Marshall Langer will be undertaking an in-depth analysis of these instruments and issues raised above.


[1] Agreement on Mutual Legal Assistance Between the European Union and the United States of America, Article 16, Territorial Application.

[2] Including trust companies and company service providers

Posted in Compliance, information exchange, Taxation | Tagged: , , , , , | 1 Comment »

Tax Information Exchange and Collection Assistance

Posted by William Byrnes on August 22, 2009


Over the past weeks, we have opened the exploration of issues addressing business and legal service outsourcing, new trends in wealth management, the history and taxation of charities, anti money laundering regulations, compliance training, and even The Obama administrations’ proposed international tax rule changes.  Many topics have been left hanging for which further researched exploration is warranted.

However this week, because of the continuing interest in Cross-Border Information Exchange, primarily due to the press about the UBS settlement and the soon turning over of approximately 5,000 tax-evading US account holders, over the coming weeks we will explore Information Exchange and Cross Border Assistance with Tax Collection.

Keep your emails coming about suggestion for this blog, and your comments.  I have been keeping up with answering each of you within a day or two.  Prof. William Byrnes (wbyrnes@tjsl.edu)

Cross-Border Information Exchange and Mutual Assistance (with regard to Tax) 

To uncover and analyze the issues of cross-border tax information exchange and also the mutual assistance with regard to tax collection by one jurisdiction on behalf of another one, we must at a minimum over the next few weeks examine the following:

(1) the behaviour of the OECD and its members toward the micro economy jurisdictions versus the OECD’s treatment amongst it own members and other economically significantly trade partners;

(2) the EU Savings Directive and other related EU Directives;

(3) the US proposal to automatically report to EU State’s bank interest of their residents;

(4) the tax application of the mutual assistance and extradition treaty between the US and EU;

(5) the geo-politics of tax information exchange agreements (TIEAs) such as positive inducements made and broken by the US to the Caribbean, and the inverse being recent threats made by the OECD to the international financial centers;

(6) other international initiatives for the provision of tax information, such as the FATF and Offshore Group of Banking Supervisors (OGBS) partnership and finally,

(7) the procedural process and practicalities of seeking tax information pursuant to an international agreement, be it a full tax treaty, a limited agreement only applying to exchange of information, another type of bi-lateral or multi-lateral instrument, or just simply domestic legislation. 

Tax Information Exchange Background

We will need to consult the following exemplary documents (amongst many others) over my coming blogticles, being: 

  • OECD Model DTA – Tax Information Exchange (Art. 26 & 27)
  • OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims
  • Convention on Mutual Administrative Assistance in Tax Matters (OECD & Council of Europe)
  • UN Model DTA – Tax Information Exchange (Art. 26)
  • OECD Model Tax Information Exchange Agreement (TIEA)
  • EU Directive on Exchange of Information
  • EU Directive on Mutual Assistance for the Recovery of Claims
  • EU Savings Directive
  • Mutual Legal Assistance Treaties (MLATs) and US-EU MLATs
  • Improving Access to Bank Information for Tax Purposes
  • Financial action task force (FATF)
  • Offshore Group of Banking Supervisors Best Practices (OGBS)

Exchange Pursuant to the OECD Conventions

OECD MODEL DTA – Tax Information Exchange (Art. 26 & 27)

Article 26, Exchange of Information, of the 2003 OECD Model Convention reads: 

The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. …  Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred to in the first sentence. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

 The 2003 OECD Model, pursuant to its Commentary to the article, allows the following methods of information disclosure[1]

  • By request
  • Automatically
  • Spontaneously
  • Simultaneous examination of same taxpayer between the two States
  • Allowing requesting foreign Revenue examination of taxpayer in requested State
  • Industry-wide exchange of tax information without identifying specific taxpayers
  • Other methods to be developed between the States

The 2003 Model established limitations on the request of information:[2]

  • Requested State is not obliged to go beyond its own or the Requesting State’s capacity pursuant to its internal laws in providing information or taking administrative actions.
  • Requested State should not invoke tax secrecy as a shield.
  • Requested State is not obliged to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process.
  • Requested State is not obliged to supply information regarding its own vital interests or contrary to public policy (Ordre Public).

 Article 27 of the 2003 Model addresses assistance in the collection of taxes, stating:

     1. The Contracting States shall lend assistance to each other in the collection of revenue claims. …

     2. The term “revenue claim” as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.

     3. … That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.

The limitations remain the same as under Article 26 but also include that the Requesting State must have exhausted reasonable efforts of collection and conservancy pursuant to its domestic law.  Also, the Requested State’s obligation is limited if its administrative burden would exceed the tax collected for the Requesting State.

2003 OECD Model Agreement for Tax Information Exchange (TIEA)

The OECD Model TIEA was developed by an OECD Working Group consisting of the OECD Members and delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino.  The OECD Model TIEA obviates from several principles established in the 2003 OECD Model DTA, 2001 UN Model, 1981 OECD Convention on Tax Claims and 1988 OECD Convention on Administrative Assistance.

The Model TIEA provides that the Parties shall give “information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.”  The Model TIEA allows for a two year phase between information sought in criminal tax matters, i.e. criminal tax evasion, versus the later extension to information sought in civil tax matters i.e. civil tax evasion but importantly also tax avoidance.   

The TIEA obviates from the traditional requirement of dual criminality, that is the underlying crime for which information is sought should be a crime in both Parties’ domestic laws: “Such information shall be exchanged without regard to whether the conduct being investigated would constitute a crime under the laws of the requested Party if such conduct occurred in the requested Party.”

Because the OECD Model TIEA is meant to be applied to negotiations with jurisdictions that do not have a direct tax system, the TIEA provides that the Requested Party must seek requested information even when it does not need the information for its own tax purposes.  But a Requested State is not obliged to exceed the power to gather information that is allowable under its laws.  However, the TIEA is specific that each Party is obliged to provide:

“a) information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees;

b) information regarding the ownership of companies, partnerships, trusts, foundations, “Anstalten” and other persons,…ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and in the case of foundations, information on founders, members of the foundation council and beneficiaries….”

Procedurally, the Requesting State’s competent authority must provide, in order to “demonstrate the foreseeable relevance of the information to the request” the following information:

“(a) the identity of the person under examination or investigation;

(b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;

(c) the tax purpose for which the information is sought;

(d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information;

(f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;

(g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.”

Next Blogticle

In our next blogticle we will next turn to the 1988 Convention On Mutual Administrative Assistance In Tax Matters and continue form there.  In case you are wondering what this Convention is and why it is relevant, it came into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US,  providing for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.

In the Tax Treaties course starting September 14, Prof. Marshall Langer will be undertaking an in-depth analysis f these instruments and issues raised above. 


[1] Commentary to Article 26, paragraph 1 sections 9. and 9.1, OECD Model Tax Convention, 2003.

[2] Commentary to Article 26, paragraph 2 sections 14, 15 and 16, OECD Model Tax Convention, 2003.

Posted in Compliance, Financial Crimes, Taxation | Tagged: , , | 3 Comments »

Are Financial Service Firms Serving High Net Wealth Suffering As a Result of Compliance Costs?

Posted by William Byrnes on August 19, 2009


Over the past blogticles, we have been examining a number of financial crimes issues including several for anti money laundering.  Now we turn to compliance costs and the dis-connect?  Feel free to comment or email me with any burning questions, Professor William Byrnes (www.llmprogram.org), as well as join one of our weekly webcasts.

Are Financial Service Firms Serving High Net Wealth Suffering As a Result of Compliance Costs?

In my 900-page economic report on the international financial services industry, I examined and calculated the economic size and impact of the sector on local jurisdictions.[1]  But for periods of global financial crisis, the sector had experienced double-digit annual growth and contributed robustly to the local economy and society.  Since 1998, the international financial services sector client base has expanded nearly 10% on average. 

In the past decade, the number of global high-net-worth individuals (HNWIs) served by practitioners, such as my able graduates, has doubled to more than 10 million by 2008 (though the global financial crisis has caused a decline to less than 9 million) —and their assets have more than doubled from $17 trillion to $40 trillion though currently just under $33 trillion due to the last twelve month’s financial crisis.[2] 

Is The Future For Clients Dim?

Dim? On the contrary!  In just four years, the pool of HNWI clients’ assets is projected to grow to nearly $50 trillion.  Though the global re-calibrating of asset values may impact the nominal wealth value for HNWIs in the short term, historically, based upon both the recessions coined after the Asian Financial Crisis and the Tech-Bust, the wealth value will likely return to projected levels with a two-year lag. 

The average HNWI, excluding the value of primary residences and collectables, is worth approximately $4 million!  HNWI’s continue to leverage offshore skill sets, growing their assets from $5.8 trillion from 1998 to $11 trillion today.[3]  That $11 trillion under management represents, at combined fees of just 1%, at least $100 billion to private bank firms offshore, and six times that taking all HNWI assets into account.

Some Financial Centers Spend More on Compliance than Others

39% of Florida banks surveyed reported that private banking accounted for more than 50% of their operating revenues.  Florida’s international private banking and wealth management customers predominantly reside, as one would expect, in Latin America and the Caribbean, with 1/3 residing in Europe.  South American residents account for 44% of private banking and wealth management customers of Florida’s international banks.  Approximately 19% of international private wealth management clients reside in Mexico or Central America, while 4% reside in the Caribbean.

Even though the market has been growing in terms of the available pool of HNW clients, the international banking industry in Florida has been characterized by consolidation and contraction since 2000.  The number of foreign bank agencies operating in Florida fell from 38 in 2000 to 31 in 2005.[4]  There were 10 Edge Act banks operating in Florida in 2000, but only 7 in 2005.  The number of international banking employees (in foreign agencies, Edge Acts and the international divisions of domestic banks chartered in Florida) declined from 4,660 in 2000 to 3,027 in 2005.

Based on a survey of banks significantly engaged in international banking in South Florida, the economics firm based on direct surveys estimated Miami’s international bankers staffing cost for 271 full-time employees of anti-terrorism/anti-money laundering compliance at nearly $25 million in 2005. [5]  The average survey respondents indicated that it devoted 2.9 FTE employment positions to BSA/AML compliance in 2002 versus 6.8 FTE positions in 2005. The number of full-time employees devoted to compliance represented 9% of the workforce in 2005.  Staff resources devoted to compliance increased by 160% between 2002 and 2005.

So Where is the Dis-Connect?

So if enough money is being spent by some banks, by example in Miami, and this expenditure is even potentially impacting earnings in some regions such as Miami, (as an industry – small institutions are being clobbered compared to their larger brethren), then why are some banks and other financial service providers employees failing in their implementation of AML programs in light of the expenditure?   Where is the dis-connect between expenditure and results?  Might the expenditure be more about white-washing than about achieving an educated work force?  Might throwing money at the problem not be the answer?  Or is not enough money flowing to training?

As the Miami marketplace apparently illustrates, in general the compliance and training budgets have reached the deal-breaker point at some banks and in some regions.  Thus, rather than it being a quantitative issue of bigger budgets, it is more likely a qualitatively issue, that is, spending either on poorly designed products or on good products but with poor instruction, follow-up, and support.  It may be that purchasing decisions are based not on price, but rather are based on how to spend as little labor time as possible to meet a minimum level of information and training sufficient for an employee to appear to be able to implement AML policy.  That is, institutions may be spending more to obtain less quality products because the product requires less labor activity time.

By example, some institutions send the high level AML staff for a one or two day workshop at between one and three thousand dollars and now call that staff member an expert.  A time-saving approach certainly.  But is this a reasonable approach in light of the likely outcomes of such minimal education consisting of little to no follow up, guidance, and academic support?  Can a board member, much less a regulator, feel confident that such a staff member is able to exercise the necessary skills gained from the one or two day session to protect the financial institution and public from an money laundering/financial crime incident?

By another example, some financial service provider compliance officers and their advisors will establish a library budget, purchasing a variety of publications.  Yet the staff is not trained in knowledge management for the library, that is how to interact with and study such information. Thus, the library collects dust.

White-Washing

Is a two day course sufficient to qualify someone as a certified expert?  A one week course even?  How long will the regulators allow such white washing to continue, or is it merely an issue of fines when holes are found in the dikes?


[1] Report on the Economic, Socio-Economic, and Regulatory Impact of the Tax Savings Directive and EU Code of Conduct for Business Taxation upon Selected Offshore Financial Centers as well as a Competitiveness Report for Selected Offshore Financial Centers (Foreign Commonwealth Office 2004).

[2] Cap Gemini Merrill Lynch World Wealth Report 2003 through 2008.

[3] Tax Haven Abuses: The Enablers, The Tools and Secrecy” (Sen. Rep., Perm. Sub-Comm. On Investigations, August 1, 2006) and World Wealth Report 2008.

[4] In 2005, however, 7 of the 31 international banks had no deposits booked in Florida, while in 2000 only 2 of the 38 had zero deposits.

[5] It is important to note that these cost estimates only include manpower or staffing costs, and do not include costs such as transaction monitoring software, possible IT investments and services, legal counsel and similar support.  The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

Posted in Compliance, Money Laundering, Wealth Management | Tagged: , , | Leave a Comment »

Is AML Training Effective or Whitewashing? Part II

Posted by William Byrnes on August 15, 2009


In my previous blogticle I presented a few of the very many examples of regulatory fines for financial institutions failing to meet minimum money laundering training for staff, in many cases leading to failures of their money laundering risk management system.  Hereunder I turn to expenditures on money laundering training.

Consider that the above regulatory enforcement actions, and those referred to by the GAO report, were issued at least three years after the US financial institutions were put on initial notice of the hawkish nature of enforcement of AML programs.  Certainly, neither management nor staff wanted to, by example, be responsible for over 2,000 filing errors for only 1,639 SARs.  Riggs divestiture of its international banking operations certainly provided a resounding warning for boards to take their AML compliance responsibilities seriously.  Enforcement actions generally lead to management and staff level firing holding persons accountable for their errors.

In a global review of money laundering legislation throughout financial centers, none of the legislation provides specific benchmarks or at least an assessable minimum standard for a level of training of the staff or the MLRO.  Further, the regulator guidance, where available, is scant to the issue of quality assurance of training.  The US Federal Financial Institutions Examination Council’s (“FFIEC”) Bank Secrecy Act/Anti Money Laundering Manual (“Manual”) states that a bank must –

        “[T]rain employees to be aware of their responsibilities under the BSA regulations and internal policy guidelines”

 whereas the UK FSA Handbook states that a firm’s should ensure that its –

         “systems and controls include (1) appropriate training for its employees in relation to money laundering …”.[1] 

The FFIEC Manual’s most specific example of what should be contained within a training program is “…training for tellers should focus on examples involving large currency transactions or other suspicious activities; training for the loan department should provide examples involving money laundering through lending arrangements.”

Aren’t Expenditures on Training Going up, uP, UP?

Thus, to avoid enforcement actions and thus being fired, in some markets the training budgets and the compliance cost per-dollar-of-deposit have more than doubled.  By example, from 2002 – 2005, banks offering international financial services in Miami reported a 160% increase both in the total costs of staff resources devoted to AML compliance and in the compliance costs of staff resources per dollar of deposit.[2] 

Senior banking management perceives rising and unpredictable compliance costs that undermine global competitiveness as the most significant threats to the future growth of banking.[3]  The cost of AML compliance increased around 58% globally and 71% in North America between 2004 and 2007.[4]

A 2005 survey of Florida banks engaged in international banking estimated the staffing cost of AML compliance at nearly $25 million. The study concluded that compliance costs are not uniform across institutions, even after making adjustment for size.[5] Banks estimate that training costs and transaction monitoring will require the largest investment of all AML activities. All North American banks provide AML training for nearly all of their employees. See KPMG’s Figure in its AML Survey.

Larger institutions (measured in terms of deposits) typically devote more resources and spend more on compliance than smaller ones, of course, but the compliance burden does not rise proportionately with size.  That is, survey data indicates that economies of scale in compliance are present, and that compliance costs per dollar of deposits is greater for smaller institutions than for larger ones.[6] Even after the dramatic increases in compliance costs and regulatory complexity since 2001, the regulatory environment is likely to become increasingly challenging in coming years.

In a 2006 Economist Intelligence Unit survey, international senior bank executives were asked about the costs of compliance with government regulation. When asked what changes they expected in the regulatory environment over the coming three to five year, over 91% stated that they expected regulations affecting their institution to grow in complexity and breadth, 88% stated that compliance with industry regulations will become more onerous, and 81% reported that they expect penalties for non-compliance to increase in severity.[7]


[1] http://www.ffiec.gov/pdf/bsa_aml_examination_manual2007.pdf and http://fsahandbook.info/FSA/html/handbook/SYSC/6/3#D78.

[2] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[3] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[4] KPMG’s Global Anti-Money Laundering Survey 2007.

[5] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[6] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[7] Economist Intelligence Unit, Bank Compliance: Controlling Risk and Improving Effectiveness (2006).

Posted in Compliance, Financial Crimes, Money Laundering | Tagged: , , | 2 Comments »

Is AML Training Effective or Whitewashing?

Posted by William Byrnes on August 10, 2009


Over the coming weeks we will examine a number of financial crimes issues including several for anti money laundering.  Feel free to comment or email me with any burning questions. Professor William Byrnes (www.llmprogram.org) as well as join one of daily webcasts.  This is part one in a series that I will compose on whether instiutions are implementing effective training programs or merely whitewashing to avoid criticism (at the cost of risk of non-detection of internal or external AML infraction).

The Regulatory Environment [1]

For the past several years, the US banking industry has focused on regulatory issues, such as the corporate governance provisions of the Sarbanes-Oxley Act (enacted in 2002) and the banking-related parts of the USA Patriot Act (enacted in 2001). Much literature and studies have been provided regarding the cost impact of the various implemented measures.

Smaller community banks have contended that it is difficult for them to comply with certain Sarbanes-Oxley provisions, such as the requirement that audit committees be composed entirely of independent directors and that companies have a “financial expert” on the board of directors. The provisions of the USA Patriot Act require increased investments in technology (though many in the industry have questioned the effectiveness of these investments in preventing the funding of terrorist groups or activities).

The Reporting Impact

Resulting from the impetus of the Al Qaeda’s terrorist attacks of 9/11, the US financial institution regulators became an enforcement hawk of the money laundering provisions of the Bank Secrecy Act (“BSA”).  In turn, hawkish enforcement has led to a drastic increase in the number of BSA filings.  In 2007, the approximate two hundred thousand US depository institutions filed over 649,176 Suspicious Activity Reports (“SAR”s), as  reported by the US Government Accountability Office (“GAO”) (over 1.2 million SARs filed by all financial service providers).  In 2008, these deposit institutions increased their SAR filings by nearly a hundred thousand.  In contrast, just two hundred, twenty thousand STRs were filed in the UK by all covered persons in 2006-07 (of which 140,000 were filed by banks) with a 10,000 total filing decrease last year.[2] 

This begs the question: are too many being filed in the USA, clogging the investigatory system, or are too few filed in the UK, allowing criminals to operate freely?  And leads to many other questions such as: Do criminals launder more money in the US and less in the UK?  Are US personnel improperly trained and thus filing SARs improperly or with little use?  Are UK institutions whitewashing their responsibilities and thus staff are not equipped to identify suspicious transactions and patterns?  We will discuss these and many others if not here, in the webinars.

Notwithstanding this level of apparent US hawkish compliance, the GAO noted that the federal regulatory authorities cited well over 7,000 BSA violations, leading to over 2,000 various actions against banking institutions.  Interestingly, a majority of 2005 actions were issued against the traditionally smaller credit unions that at first glance may be considered to carry less risk for money laundering.[3]  Moreover, these enforcement figures did not include the actions taken against casinos, jewelry stores, and money service businesses, such as check-cashing, whose anti money-laundering (“AML”) program compliance is audited by the IRS. 

Managing Risk through Training

International financial centers all have a requirement that firms subject to money laundering legislation have a designated compliance officer, known by different acronyms such as MLRO.  Further, the legislation requires staff training on a continuing basis.  By two examples, the USA and the UK respectively:

Bank Secrecy Act § 5318:

(h) Anti-Money Laundering Programs.—

(1) In general.— In order to guard against money laundering through financial institutions, each financial institution shall establish anti-money laundering programs, including, at a minimum—  …

(B) the designation of a compliance officer;

(C) an ongoing employee training program; ….

The Money Laundering Regulations 2007 Training: 

21. A relevant person must take appropriate measures so that all relevant employees of his are—

(a) made aware of the law relating to money laundering and terrorist financing; and

(b) regularly given training in how to recognise and deal with transactions and other activities which may be related to money laundering or terrorist financing.

KPMG reports that the training of employees to recognize money laundering, which is labor intensive, has required a big cost increase for banks.  Yet, reviewing a few of the high dollar value civil penalty actions issued by the US regulators in the last two years illustrates that a lack of money laundering expertise at the management level and a lack of firm wide education and training at the staff level cuts across both large and small banking firms. 

Penalties for Lack of Training and Expertise

The highest publicity action in the past few years occurred against American Express Bank International (“AMEX”) – shortly thereafter purchased by Standard Chartered.  AMEX’s original sixty-five million dollar penalty resulted partly from the gross amount of errors in just one year in its SAR filings regarding its private banking services to its high net-worth individuals (HNWI) and the individuals’ respective businesses throughout Latin America.  In the 12 month period from May 2006, over 2,000 filing error were found for only 1,639 SARs, not including over 1,000 late SAR filings.  Other recent large penalties citing the lack of staff training include ABN-AMRO’s (forty million dollars) and fines of ten million dollars each for Bank Atlantic and AmSouth. 

A medium size Chicago head office bank suffered a two million dollar penalty because “management failed to implement adequate training for appropriate personnel to ensure compliance with the suspicious activity reporting requirements”.  The regulator found that the  Bank staff was inadequately trained in suspicious activity identification and monitoring, detection of structured transactions, and identification of possible money laundering.  Israel Discount Bank, with branches in a few states, paid a twelve million dollar file for inadequately training its staff regarding the heightened risks associated with its transaction involving Delaware LLC shell companies.  On the opposite size spectrum from AMEX, a one branch bank, Beach Bank of Miami, with less than $150 million in assets, suffered an eight hundred thousand dollar fine for its lack of monitoring of high risk accounts, including six foreign correspondent accounts. 


[1] Standard and Poor’s Industry Surveys: Banking (Dec. 6, 2007).

[2] The SAR Activity Review – By the Numbers Issue 10 (FINCEN May 2008); Money Laundering Regulations 2007: Regulatory Impact Assessment (HM Treasury July 2007), and The Suspicious Activity Reports Regime, Serious Organised Crime Agency (SOCA) United Kingdom http://www.soca.gov.uk/assessPublications/downloads/SAR-Annual-Report-08-pn.pdf.

[3] http://www.gao.gov/cgi-bin/getrpt?GAO-07-212

Posted in Compliance, Financial Crimes, Money Laundering | 5 Comments »

Early American Distrust and Gradual Acceptance of Charitable Institutions

Posted by William Byrnes on August 9, 2009


This week I again turn my blogticle to expiscate the eristic historical context of the tax advantaged treatment enjoyed by charitable institutions.  In the previous blogticle on the Common Law history of charity law, we examined English history from the period 1536-1739.  Now I turn my attention to the period of the United States’ colonial period until 1860. 

Colonial Period 

The Colonies inherited the English common law and its history discussed in my previous blogticle on this subject, but without the 1736 Mortmain Act.  In addition to the common law, the colonialists also inherited the English distrust of perpetual land restriction, the power exercised by the Catholic Church because of its substantial land holdings, and the distrust of the Anglican Church because it was an organ of the English government.[1] 

During the early period after the War of Independence, some states legislatures and courts exercised this inherited distrust by voiding the establishment of charitable trusts, denying the grant of charters for charitable corporations, and constricting transfers to both.[2]  Seven states, being Maryland, Michigan, Minnesota, New York, Virginia, West Virginia, and Wisconsin, voided charitable trusts.[3]  In contrast, many states, in their constitutions and well as by statute, borrowed from Elizabeth I’s 1597 statute to protect incorporation for charitable purposes.[4]  Charitable incorporations included churches, charities, educational institutions, library companies, and fire companies.[5]  The policy behind the charitable statutes included promotion of freedom of religion, easing legislative workloads, and easing of incorporation procedures.[6] 

But not all states had charitable incorporation statutes.  Some states, such as Virginia, denied granting charters to charitable corporations for several years.[7]  Of the states with charitable incorporation statutes, all contained restrictions regarding maximum income, expenditure for charitable purpose, as well as reporting rules to guard against the accumulation of property.[8]

Post Colonial: Universal Property Taxes Crystallize the Tax Exemption Debate

By the middle of the century, the Supreme Court of the United States, by examination of the Statute of Charitable Uses and common law applicable in the U.S., derived a broad definition for charity.[9]  The Court upheld contributions to “charitable” institutions based upon the factors of the institutions’ public purpose and freedom from private gain.  In 1860, upholding a devise and bequest for establishing two education institutions, the Court stated

         “a charity is a gift to a general public use, which extends to the rich, as well as to the poor” and that “[a]ll property held for public purposes is held as a charitable use, in the legal sense of the term charity.”[10] 

In 1877, upholding a devise to an orphan’s hospital, the Court presented that:

        “A charitable use, where neither law nor public policy forbids, may be applied to almost any thing that tends to promote the well-doing and well-being of social man . . . . ‘Whatever is given for the love of God, or the love of your neighbor, in the catholic and universal sense, — given from these motives and to these ends, free from the stain or taint of every consideration that is personal, private, or selfish.’ ”[11]

Until the mid 1850s, many state statutes allowed incorporation for charitable purposes but did not necessarily exempt these corporations from state tax.[12]  Before the 1830s, the states did not have a universal tax system and thus, while tax exemption expressed government favoritism, it was not practically significant.[13]  However, the 1830s enactment of universal property tax regimes brought the issue of exemption to the fore.[14]  During the remainder of the century, several states enacted limited tax exemption for churches and educational institutions.[15]  By example, many states exempted from property tax the land upon which a church stood, but taxed the church’s income, including ministerial, rental, and endowment.[16]  The Massachusetts statutory tax exemption for religious, educational, and charitable organizations, applying to Harvard University, did not include an exemption for real estate or businesses held for purposes of revenue.[17]

Tax Policy Debate

Supporters and critics of exemption debated three primary policies concerning the granting of limited tax exemption for churches.  From a public policy perspective, the general community felt that the church served as the communal epicenter.[18]  Church supporters also put forward that churches provide the benefits of encouragement of personal morality, public spiritedness, and democratic values.[19]  Critics countered that from an equity standpoint, exemption inequitably expressed state favoritism for religious groups over non-religious property owners.[20]  Also, exemption critic James Madison warned that the accumulation of exempt Church property would eventually result in religion influencing the political process.[21]

Supporters provided a tax policy justification that the limited exemptions applied only to the charitable institution’s property that produced insignificant income, such as cemeteries, the church, the school, thus the exemption’s revenue effect would be slight.[22]  Critics responded that whereas both exempt and non-exempt persons used the state’s services, only non-exempt persons paid for them with resultant increased burdens upon them.[23]  Supporters retorted to this argument of an inequitable burden with a government benefit argument that the churches provided public services, such as orphanages and soup kitchens, not performed by non-exempt payers.[24]

From an economic policy justification, supporters forwarded that because many of these exempt institutions did not produce much revenue, the tax could not be collected, leading to unpopular land seizure.[25]  Critics responded that the exemption primarily benefited wealthy churches with valuable property and significant income rather than the humble ones with low land value and de minimis income.[26]  Again employing the subsidy argument, supporters argued that all church income, regardless of church size, went to provide charitable services, such as religious activity and caring for the poor.[27]

Prof William Byrenes (www.llmprogram.org)


[1]After the revolution, the colonialists felt the same distrust for the Church of England as that for Rome.  See James J. Fishman, The Development of Nonprofit Corporation Law and an Agenda for Reform, 34 Emory L.J. 617, 624 (1985) (commenting on the ongoing anti-charity-anti-clerical atmosphere of the post-colonial period); Note, The Enforcement of Charitable Trusts in America: A History of Evolving Social Attitudes, 54 Va. L. Rev. 436, 443-44 (1968) (same).  This distrust of the Catholic Church reached into the late nineteenth century, creating opponents of tax exemption for religious institutions.  See Stephen Diamond, “Of Budgets and Benevolence: Philanthropic Tax Exemptions in Nineteenth Century America”, 17 (Oct., 1991) (Address at the N.Y.U. School of Law, Program on Philanthropy, Conference on Rationales for Federal Income Tax Exemption, Oct. 1991), http://www.law.nyu.edu/ncpl/abtframe.html (last visited Jul. 9, 2003); see also Erika King, Tax Exemptions and the Establishment Clause, 49 Syracuse. L. Rev. 971, 1037 n.8 (1999) (quoting James Madison’s statement that “[t]here is an evil which ought to be guarded [against] in the indefinite accumulation of property from the capacity of holding it in perpetuity by ecclesiastical corporations.”)

[2] See Evelyn Brody, Charitable Endowments and the Democratization of Dynasty, 39 Ariz. L. Rev. 873, 906-10 (1997); Fishman, supra at 623-25; John Witte, Jr., Tax Exemption of Church Property: Historical Anomaly or Valid Constitutional Practice?, 64 S. Cal. L. Rev. 363, 384-85 (1991).

[3] 4 Austin Wakeman Scott, The Law of Trusts § 348.3 (3d ed. 1967).  Some states, such as Virginia in 1792, repealed the pre-independence English statutes, including the Statute of Charitable Uses.  The lack of the Statute of Charitable Uses consequence, as argued by the States and agreed by the Supreme Court in Trustees of Philadelphia Baptist Ass’n v. Hart’s Executors, 17 U.S. 1, 30-31 (1819), was that charitable trusts without stated beneficiaries were void because of the lack of common law precedent for establishing a trust without a beneficiary.  Nina J. Crimm, An Explanation of the Federal Income Tax Exemption for Charitable Organizations: A Theory of Risk Compensation, 50 Fla. L. Rev. 419, 427 (1998) (noting that this decision and ones following it led to the establishment of charitable corporations instead of trusts to receive donations).

[4] Fishman, supra at 623 (noting that Massachusetts, Pennsylvania, Vermont, and New Hampshire constitutionally protected charities). 

[5] Fishman, supra at 631-32; see also Christine Roemhildt Moore, Comment, Religious Tax Exemption and The “Charitable Scrutiny” Test, 15 Reg. U. L. Rev. 295, 299 (2002-2003) (noting that most new states had an established state church, which took over the former role of the Church of England as an organ of the state, and that, after disestablishment from the state, tax exemption continued as a matter of course).

[6] See Fishman, supra at 632-33.

[7] See Witte, supra at 385; Brody, supra at 906-07; Nina J. Crimm, A Case Study of a Private Foundation’s Governance and Self-Interested Fiduciaries Calls for Further Regulation, 50 Emory L.J. 1093, 1099 (2001); Fishman, at 631 n.70 (noting that corporate charters were granted to only 355 businesses during the eighteenth century).

[8] See Fishman, supra at 634; see also Brody, at 909 (noting that a few state statutes still constrict the ability to devise to, or the holdings of, charitable corporations).

[9] See Lars G. Gustafsson, The Definition of “Charitable” for Federal Income Tax Purposes: Defrocking the Old and Suggesting Some New Fundamental Assumptions, 33 Hous. L. Rev. 587, 609-610 (1996).

[10] Perin v. Carey, 65 U.S. 465, 494, 506 (1860).

[11] See Gustaffson, supra, at 610.

[12] For a historical summary of nineteenth century American policy regarding the ad hoc to infrequent granting of tax exemption for charitable institutions, see Diamond, supra at 12. For a description of colonial church exemptions and taxation of certain income producing properties, see Witte, supra at 372-74.

[13] See Diamond, supra at 8-9.

[14] See Id. at page 10; Witte., supra at 385-86.

[15] See Diamond, supra at 12.

[16] Id

[17] Chas. W. Eliot, The Exemption from Taxation of Church Property, and the Property of Educational, Literary and Charitable Institutions, Appendix to the Report of The Commissioners Appointed to Inquire into the Expediency of Revising or Amending the Laws Related to Taxation and Exemption Therefrom 367, 386 (1875) (stating that Harvard paid tax on its various business holdings in Boston, save one specifically exempted from tax in its Charter).

[18] See Witte, supra at 374-75.  The underpinnings of this public policy to exempt the church drew from the historical exemption justified by two causes.  Most states had an official church established by government as an organ of the state government, continuing the English tradition.  Id.   Second, the Churches acted as the community services center of most townships, thus providing the local government services that otherwise it should undertake.  See id. at 375.  This second justification foreshadowed the government benefit analysis employed by Dr. Eliot.  See infra Part VI(C).

[19] John W. Whitehead, Church/State Symposium Tax Exemption and Churches: A Historical And Constitutional Analysis, 22 Cumb. L. Rev. 521, 539-40 (1991-1992).

[20] Witte, supra at 381.

[21] Id. at 382.  This criticism of exemption, reiterated by President Ulysses Grant, most influenced the Walsh Commission’s perspective on industrialists’ foundations as well as that of the Reece Commission.  See infra Parts VIII, IX(D).

[22] See Diamond, supra at 14.  In 1873, James Parton countered this justification, alleging examples of such charitable institutions producing extraordinary income.  See infra Part VI.

[23] See Witte, supra at 381.

[24] Whitehead, supra at 540.  Dr. Eliot further enunciated the government benefit, also known as the tax subsidy, argument that the state ought to grant exemption for the charitable provision of public service.

[25] See Diamond, supra at 14.  In 1873, James Parton proffered a liberal argument of land distribution efficiency that could only be achieved through such unproductive property being seized and auctioned back into commerce.

[26] See Witte, supra at 382.

[27] See Whitehead, supra at 539-40.

Posted in Legal History, Tax Exempt Orgs, Taxation | Tagged: , , | Leave a Comment »

England’s Historical Legislative Treatment of Charitable Institutions

Posted by William Byrnes on August 7, 2009


When asked to comment upon the various versions of health care reform bills that will soon be voted upon by Congress, I recalled quote by Russell Long, then Chair of the Finance Committee[1]:

         “When the Finance Committee began public hearings on the Tax Reform Act of 1969 I referred to the bill as ‘368 pages of bewildering complexity.’  It is now 585 pages  . . . .”

 This week I turn my blogticle to expiscate the eristic historical context of the tax advantaged treatment enjoyed by charitable institutions.  Why charitable institutions?  In the United States, charitable institutions are known as tax exempt ‘non-profits’ though some are profitable in the accounting sense.  By example, many hospitals, though profitable and even lucripetous, are granted by the federal and state revenue authorities tax exempt status as charities.  However, Congress has pretermitted any issues, and thus leverage, associated with the tax exempt status of health care providers in the various health care reform bills.

 England’s Historical Legislative Treatment of Charitable Institutions

In order to finance his reign, Henry VIII seized the Catholic Church’s and universities’ lands and with parliament enacted The Statute of Uses in 1536 and The Chantries Act in 1545.[2]  The Statute of Uses, in enacting the rule against perpetuities, terminated the situation that most English land, in order to escape feudal dues, was held from family generation to generation in dynastical, perpetual trusts owned by the Church.[3]  The Chantries Act provided for escheat of colleges’ possessions.[4]  The government established as an organ of itself with tax-exempt status by its sovereign nature the Church of England, replacing the Catholic Church.[5]

See-sawing in favor of charitable institutions, under Elizabeth I in 1597, parliament enacted a charitable corporation act that exempted specified institutions from government charges and the requirement of government consent when formed for the following purposes:

        to erect, found, and establish, one or more hospitals, maison de Dieu, abiding places, or houses of correction, . . . as well as for the finding, sustentation, and relief of the maimed, poor, needy or impotent people, as to set the poor to work, to have continuance forever, and from time to time place therein such head and members, and such number of poor as to him, his heirs and assigns should seem convenient.[6]

Furthering Elizabeth I’s charitable incorporation statute by suppressing the application of Henry’s Statute of Uses and its rule against perpetuities, four years later Parliament enacted the Statute of Charitable Uses, 1601, allowing real property transfers to perpetual charitable trusts.[7]  The Statute provided for exemption from the Statute of Uses for a transfer to a charity that provided:

        relief of aged, impotent and poor people, . . . maintenance of sick and maimed soldiers, schools of learning, free schools, and scholars in universities, . . . repair of bridges, ports, havens, causeways, churches, sea-banks and highways, . . . education and preferment of orphans, . . . relief, stock or maintenance of houses of correction, . . . marriages of poor maids, . . . aid and help of young tradesman, handicraftsman and persons decayed, relief of prisoners, . . . aid of any poor inhabitants.[8]

However, during the late sixteenth century and seventeenth century, the Crown often piecemeal interfered with religious charitable trusts, either voiding the trust or employing cy pres to divert the trust assets to the Crown’s favored religion.[9]  Charitable institutions once again falling out of the Crown’s blanket favor, two hundred years after and in the same vein as the Statute of Uses, Parliament revived a specific anti-charity statute, The Mortmain Act, in 1736.[10]  The Mortmain Act of 1736 invalidated real property transfers to any charity mortis causa as well as inter vivos transfers made one year or less before death.[11]  Though this statute limiting the funding of charities remained English law until The Charities Act, 1960, Parliament modified it in 1891 to allow for exceptions for devised property not to be used for investment, thus endowment, purposes.[12]

Prof. William Byrnes (http://www.llmprogram.org


[1] 115 Cong. Rec. S14,944 (1969) (statement of The Hon. Russell B. Long), reprinted in 1969 U.S.C.C.A.N. 2391, 2490.

[2] Evelyn Brody, Charitable Endowments and the Democratization of Dynasty, 39 Ariz. L. Rev. 873, 901, 909-10, 911-13 (1997) Henry VIII was by no means the first king to dissolve monasteries. 

[3] Brody at 901.

[4] Brody at 912-13.

[5] See Christine Roemhildt Moore, Comment, Religious Tax Exemption and The “Charitable Scrutiny” Test, 15 Reg. U. L. Rev. 295, 298-99 (2002-2003).

[6] See James J. Fishman, The Development of Nonprofit Corporation Law and an Agenda for Reform, 34 Emory L.J. 617, n.65 (1985).

[7] Lars G. Gustafsson, The Definition of “Charitable” for Federal Income Tax Purposes: Defrocking the Old and Suggesting Some New Fundamental Assumptions, 33 Hous. L. Rev. 587, 605 (1996) (citing An Act to redress the Mis-employment of Lands, Goods, and Stocks of Money heretofore given to Charitable Uses, 1601, 43 Eliz., ch. 4 (Eng.)).

[8] Oliver A. Houck, With Charity For All, 93 Yale L.J. 1415, 1422 (1984) (quoting Charitable Uses Act, 1601, 43 Eliz., ch. 4).

[9] See Norman Alvey, From Charity to Oxfam: A Short History of Charity Legislation 10-11 (1995).

[10] See Gustafsson at 606, 649 n.62 (noting that Mortmain statutes had previously been enacted in England but the Statute of Charitable Uses substantively repealed them); see also Brody, at 903 (noting that Parliament’s sentiments for legislating the statute are uncertain, but may have been due to anticlerical feelings).

[11] Alvey at 11.

[12] Brody at 905 n.147 (noting that the statute was modified in 1891 to allow either the court or the Charity Commissioners to grant exception for a mortis causa real property transfer to charity as long as the property was to be used for charitable activity rather than for investment purposes).

Posted in Legal History, Tax Exempt Orgs, Taxation | Tagged: , , , , , | 1 Comment »

Compliance at Wealth Management Firms: Threats to Profitability or an Opportunity to Restore Confidence?

Posted by William Byrnes on August 3, 2009


Financial service providers are required by the provisions of the USA Patriot Act to make substantial investments in technology (though many in the industry have questioned the effectiveness of these investments in preventing the funding of terrorist groups or other nefarious activities).[1]  Senior banking management perceives rising and unpredictable compliance costs that undermine global competitiveness as the most significant threats to the future growth of banking.[2] 

Based on the survey of Miami banks significantly engaged in international banking, staffing costs rose to 271 full-time employees of anti-terrorism/anti-money laundering compliance for approximately $25 million in 2005.  The average survey respondents indicated that it devoted 2.9 FTE employment positions to BSA/AML compliance in 2002 versus 6.8 FTE positions in 2005. The number of full-time employees devoted to compliance represented 9% of the workforce in 2005.  Staff resources devoted to compliance increased by 160% between 2002 and 2005.

The results have been that Miami’s banking industry has been characterized by contraction.  The number of foreign bank agencies operating in Florida fell from 38 in 2000 to 31 in 2005, of which 7 did not book any deposits.  There were 10 Edge Act banks operating in Florida in 2000, but only 7 in 2005.  The number of international banking employees (in foreign agencies, Edge Acts and the international divisions of domestic banks chartered in Florida) declined from 4,660 in 2000 to 3,027 in 2005.

While the cost of AML compliance increased around 71% in North America between 2004 and 2007, it rose 58% globally.[3]  By example, in 2003, the UK’s FSA’s Anti-Money Laundering Current Customer Review Cost Benefit Analysis estimated the implementation costs of the AML regime to firms at 152 million pounds sterling, substantial by European standards though paltry by America’s.

In a 2006 Economist Intelligence Unit survey, international senior bank executives were asked about the costs of compliance of government regulation. When asked what changes they expected in the regulatory environment over the coming three to five year, over 91% stated that they expected regulations affecting their institution to grow in complexity and breadth, 88% stated that compliance with industry regulations will become more onerous, and 81% reported that they expect penalties for non-compliance to increase in severity.

On the other hand, perhaps more (or more effective implementation of current) compliance and its resulting governance would have protected against or softened the blow of the systemic iceberg as well as protected against or softened the blow of the most recent investment fraud scandals.  And UBS’ level of compliance expenditure neither deterred its activity regarding 52,000[4] USA non-complaint persons, nor its substantial investments in US mortgages leading to write-downs requiring a Swiss government substantial investment to shore up its capital.  Certainly, based on the G7 and G20 meetings, as well as the discussions at the World Economic Forum, levels of compliance expenditure, compliance education, and governance will be required to be increased in order to restore institutional confidence.[5] 

Based upon HNWI clients moving away from opaque investment firms toward transparent ones, there may be an opportunity for Chartered Wealth Managers advisors members / firms to market to stung HNWIs not just as well rounded advisors, but as trustable compliance and governance oriented advisors, collaborating transparently regarding developing the HNWIs portfolio of opportunities.

Information Tools

Besides the army of lawyers advising regulated firms and the chartered accountants undertaking compliance, anti-fraud, AML, terrorist activity, and qualified intermediary (QI) audits, near and dear to myself, the publications market employment is continuing to grow.  Because compliance regulations, costs, and penalties are growing more onerous, all regulated financial service providers and their advisors must purchase some information resource to address the variety of compliance issues encountered regularly. 

Moreover, to undertake the role of the ‘trusted advisor’, a sophisticated wealth manager must have a bundle of reliable resources enabling the holistic, international, business partner approach that modern HNWIs and UHNWIs now demand.  By example of such information bundle for Chartered Wealth Managers, see the soon to be released online and print version of International Trust & Company Laws, Analysis, and Tax Planning.

Indication of this trend is that the legal, tax and regulatory publishing market has been and is growing consistently.  Legal publishing is the largest segment in professional publishing, accounting for approximately 36% of the total market. In 2007, legal publishing revenue was about $10 billion, up 7.5% from $9.3 billion in 2006 and 14.9% from $8.7 billion in 2005. [6] Legal publishers are sparking growth by developing digital tools and software out of their reference book and journal content designed to make it easier for legal professionals to find information and automate mundane tasks. 

New online publishing will use mind-mapping technology to educate users about holistic connections amongst ideas, issues, and strategies.  Growth in publishing for an industry tends to indicate growth in that industry.  By example of such new multimedia information resources see pilot projects as follows:

AML sample: http://amlsample.googlepages.com/

US tax sample: http://cmsove.googlepages.com/  

Prof. William Byrnes (www.llmprogram.org)


[1] Standard and Poor’s Industry Surveys: Banking (Dec. 6, 2007).

[2] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[3] KPMG’s Global Anti-Money Laundering Survey 2007.

[4] Agreement was reached between the US and Swiss governments July 31, 2009 for UBS to turn over of the 52,000 names to the IRS.  See Wall Street Journal US State Dept: US Pleased, Relieved About UBS Deal July 31, 2009.

[5] See The Future Of Global Financial System, World Economic Forum World Scenario Series (2009) at 22.

[6] Simba Information, Global Legal & Business Publishing 2007-2008 (2007).

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