Corruption, FATCA, and the Tightening Dragnet Around Brazilian Offshore Accounts

The Brazilian Federal Revenue Secretariat (SRF) has some good news to cheer: a big haul of fines and taxes from assets held offshore by Brazilians. The deadline for filing under Brazil’s equivalent of the Offshore Voluntary Disclosure Program ends October 31, but news reports suggest that more than US$12.6 billion in foreign bank accounts held by more than 25,000 Brazilians have already been disclosed, leading to fines and taxes of nearly US$4 billion on money ferreted away in accounts that had previously been inaccessible to tax officials. More than a third of that money has been declared in the last week alone, suggesting that by the end of the month, the absolute volume of fines and taxes may be near the amounts collected under a sister program in the United States, whereby 45,000 taxpayers contributed US$6.5 billion to the U.S. Treasury.

The voluntary disclosure program is an important part of a broader push to improve government control over Brazilians’ assets abroad. Brazil in recent years has signed a number of agreements governing the bilateral exchange of banking information, and just this month came news that the Swiss high court had upheld efforts to share banking information on more than 1,000 Swiss bank accounts believed to be held by Brazilian politicians and former Petrobras executives. In the past two decades, Brazilian regulators have also closed various glaring loopholes in domestic regulations covering foreign exchange transactions. The SRF has gained personnel and seen its budget increased, enabling it to push for and enforce tougher laws, often in cooperation with the Ministério Público, Brazil’s quasi-autonomous prosecutorial service. Together, these improvements seem to be bearing fruit. Not coincidentally, the massive Car Wash operation began as a money laundering investigation, and revenue agents have played a significant role in the operation. The recent Panama Papers leaks, listing more than 1,300 offshore accounts held by 400 Brazilians, will add fuel to this effort.

The speed with which the voluntary disclosure program has come down the pike in Brazil has been impressive. The U.S. Congress approved the Foreign Account Tax Compliance Act (FATCA) in 2010, and the U.S. government launched its program in July 2014. Prodded along by the global implementation of FATCA and associated agreements on the automatic exchange of financial information, the Brazilian Congress approved its Repatriation Law in December 2015 (in the midst of the political crisis that would eventually lead to President Dilma Rousseff’s impeachment), regulations were finalized by March 2016, and now the program is nearing completion.

Although they may seem small as a share of the US$3 trillion economy, the taxes and fines collected under the program are extremely significant. Global Financial Integrity estimates that each year between 2010 and 2012, on average Brazilians illicitly transferred more than $33 billion to accounts abroad. While the accounts disclosed under the repatriation program may not always be reflective of corruption or tax evasion, the fungibility of money and the multiple ways it can find its way from illicit to licit channels suggest that it would be ingenuous to assume the assets were all aboveboard. More important, by bringing even ostensibly licit funds into tax compliance, it will be increasingly difficult for major launderers or the corrupt to hide their ill-gotten gains in the murky backwaters of international finance.

One reason for the apparent speed and success of the program is the prospect of heavy penalties that will hit Brazilians who fail to register. Under the program, participants agree to a 15 percent tax rate and a one-time 15 percent fine on previously undeclared assets. But in November, the tax rate will rise to 27.5 percent and the fine to as much as 225 percent, along with the increasingly credible and frightening prospect of criminal prosecution. Further, bilateral agreements on bank information sharing suggest the dragnet is closing, and it will be much harder to hide funds in future. SRF officials have made a concerted effort to drum home the costs of non-adherence to the program, noting that as of January 1, 2017, they will have in place agreements with 103 countries for automatic tax revenue information sharing, as well as bilateral agreements on investigation with 34 countries. Another recent report detailed the SRF’s analysis of nearly 1,000 high net-worth Brazilians with bank accounts in the United States, and authorities’ suspicions that nearly two-thirds of these were evading Brazilian taxes.

While the admirable recent gains in Brazilian anticorruption efforts should be credited entirely to Brazilian authorities and their supporters in civil society, their recent successes will be helped along immensely by FATCA and the attendant effort to share financial data across borders. As one leading Brazilian tax official boasted, “the world is beginning to have no boundaries for the [SRF].” No longer will investigators lose track of the trail at the water’s edge; indeed, the information made available under the program should help to invigorate the increasingly bold efforts to curb massive corruption at the intersection of Brazilian politics and business.