Post image for Specter of transparency stalks expat bank accounts

Specter of transparency stalks expat bank accounts

by Garland M Baker on June 8, 2009

The transparency phantom stalking clients back in 2005 was not as obvious as he is today. Now, Costa Rica is on its knees in front of the world, pleading for forgiveness for its tax haven practices and wanting to change. The country seeks to send a strong signal to the world it has done so.

This has given the specter new, ominous powers, and he wants everyone to succumb and disclose their secret nest eggs. Many expats are scared to death their secret monies and investments in Costa Rica will be found and they will be put away in that nasty place the phantom puts tax cheaters.

These policy changes are only one reason expats and Ticos alike are being inundated by phone calls from the banks here to update their account information.

Another reason is because the Banco de Costa Rica lost miserably in court and has had to return large sums of money to clients due to fraudulent transactions over the Internet. Banco de Costa Rica was the hardest hit, but all the banks have learned they’d better be more cautious and improve their due diligence.

The banking regulatory agency is also putting pressure on the banks because it is tired of being accused it was at fault for many financial scams where expats and many other people lost hundreds of millions of dollars.

Here is some background and an update as to what is happening in the world regarding transparency and banking in general:

The Basel Committee, mentioned in the 2005 transparency article, is a group composed by 10 of the most powerful nations in the world, which agree on international banking guidelines in order to avoid risks such as terrorism, fraud, economical collapse, tax evasion, among other concerns. Costa Rica has vowed to adopt and adhere to the recommendations of the Basel Committee.

In addition, at the end of April of this year, the Organization for Economic Co-operation and Development, formed by a group of 20 developed and developing countries, issued a black list of countries that have not been cooperating with international tax regulations. Costa Rica was included along with three other nations.

Almost immediately, Costa Rican government officials responded stating that the country was going to adjust to international tax stipulations by creating a law to formally demand transparency concerning banking information from clients’ accounts. This law will allow the Internal Revenue Service to assess U.S. taxes from any profit made by expat businesses abroad. The law also will give local tax officials much greater access into bank activities.

Typical tax havens — such as some Caribbean, African and European countries — have been characterized as nations that keep tax rates low and offer banking privacy in order to entice foreign businesses to establish operations in their territory. Although Costa Rica does not lure international businesses by lowering taxes, it does provide banking information privacy, which, in turn, enables individuals to evade taxes.

For years, Costa Rican banking laws had protected clients’ privacy from government surveillance to encourage the population to open business and savings accounts and trust banks with their income, thus consolidating the Costa Rican banking system. Eventually, banking laws were modified to allow government surveillance when suspecting drug-related activities and tax evasion.

By realizing that demanding transparency from clients has not weakened the banking system in the United States and it would not jeopardize the solidity of Costa Rican banking, the government increased surveillance by creating the Superintendencia General de Entidades Financieras, an organization in charge of “ensuring transparency, strengthening and promoting Costa Rica’s financial development.” Even though the Superintendencia has been operating since 1995, it has until now only supervised Costa Ricans who work under the social security system called the Caja Costarricense de Seguro Social.

Any Costa Ricans who worked independently used to be out of the Superintendencia’s radar. The Caja collects all employee information gathered by all companies registered with it and hands the information over to the Superintendencia.

This lack of reporting let private businesses whose owners decided to evade local taxes, as well as U.S-owned companies who have not reported their earnings to the Internal Revenue Service, to enjoy peaceful and profitable times, except for the occasional visit by the Costa Rican tax collection office, which imposes hefty fines on tax evaders.

However, ever since Costa Rica was blacklisted, things have gotten much more complicated. The Superintendencia is now demanding that customers update their personal and financial information at their banks in conformity with the money laundering, fraud and drug-trafficking law. Some banks have been calling clients as well as broadcasting TV commercials that instruct clients about the importance of updating banking info to avoid having their savings and business accounts closed. Some are even giving in a weekly prize of $500 to a selected winner among the clients who undergo the updating process.

Moreover, after the terrorist attacks of Sept. 11, 2001, international regulations demanded that most countries comply with anti-terrorism guidelines, which also permeated banking information and transactions. Following anti-terrorism instructions, the Costa Rican government issued the law against terrorism in 2003, which detailed all punishment, obligations and restrictions to be imposed on the country’s population. In one of its clauses, it specifies that “all companies or individuals that are not registered under any superintendencies in the country must voluntarily register at the Superintendencia General de Entidades Financieras, which doesn’t automatically mean that they will be allowed to conduct any business operations within the country. They will also be subject to inspection concerning money laundering and drug-trafficking.”

The Public finance minister, Guillermo Zúñiga, has said “we have a commitment with the Organization for Economic Co-operation to issue and send them a law regulating banking info transparency for U.S. tax reporting purposes, without needing authorization from a judge, a pending cause or the launching of a tax fraud investigation.” Such law is scheduled to be in force at the beginning of 2010.

The transparency issue will only get to be more of a problem for expats. It is a bigger problem for the old timers — the ones that currently live here — because they are accustomed to the old lackadaisical ways and they do not want things to change.

The full access granted to local and foreign tax agencies will disclose unreported rental activities, off-the-books jobs, sportsbook and gambling operations and even those expats who conduct business in the United States and elsewhere via the Internet from here.

Things are changing and they are changing fast. Expats — old timers and new arrivals alike — had better prepare themselves for today’s reality. Banks opening new accounts will be more diligent in the process. They will also be more demanding on older clients with accounts already on the books.

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