IWTA | Global Tax Implications of the Engel list & Tax Transparency in Latin America

Global Tax Implications of the Engel List

Part one of a two-part series on the Engel List

Governments across Central America have mounted a serious effort to battle corruption, promote financial transparency and increase tax transparency, and the Biden administration has announced that it will join the fight. That fight comes via a recent U.S. call to action to promote economic opportunity in the region.

A key part of the U.S. call to action in Central America is publicly sanctioning corrupt actors who engage in financial or political misdeeds in a report known as the “Engel List”. That report is named after former U.S. Representative Eliot L. Engel, who sponsored legislation enabling the sanctions during his chairmanship of the U.S. House Foreign Affairs Committee. While the Engel List is fairly new — the first batch of names was published in July 2021 – the list could have important ramifications, especially from a tax perspective. The Engel List strategy could lead to increased enforcement of U.S. tax laws that apply to foreign persons, like the Foreign Investment in Real Property Tax Act (FIRPTA).

A Region Under Siege

Why is the Biden administration focusing on Central America? The so-called Northern Triangle of Central America, which comprises Guatemala, Honduras, and El Salvador, is mired in poverty. The depressed economic condition has generated a slew of socioeconomic problems for the region that have ripple effects into the U.S.

According to Congressional testimony, political challenges, violence committed by drug-financed criminal gangs, and a lack of jobs in the formal economy have destabilized the Northern Triangle. Testimony by Daniel F. Runde, senior vice president; and William A. Schreyer, Chair; and director, Americas Program at the Center for Strategic and International Studies, noted that the destabilization has implications far beyond the three countries comprising the Northern Triangle.

“All the problems in Central America have had international repercussions, including an ongoing migration crisis at the U.S.-Mexican border,” Runde said.

In December 2020 U.S. lawmakers decided to address the Northern Triangle crisis by enacting the United States-Northern Triangle Enhanced Engagement Act, which has a few key components. The law requires the U.S. State Department to publish an annual report – the aforementioned Engel List – of corrupt and undemocratic actors. The law also requires the State Department to devise targeted anti-corruption sanctions aimed at activity in the three countries.

The Engel List: Outing Bad Actors

The Engel List targets three kinds of corrupt activity:

• Corruption related to government contracts;
• Bribery and extortion;
• The facilitation or transfer of the proceeds of corruption, including proceeds obtained through money laundering.

Individuals who are placed on the Engel List will be subject to extensive sanctions, including the blocking of their U.S.-based property assets, ineligibility for U.S. visas or admission to the U.S., revocation of existing U.S. visas, and potential penalties.

Importantly, the government will engage in several domestic and international partnerships to do this work. The State Department will partner with state attorneys general, the U.S. Department of Justice and other U.S. government agencies to handle corruption-related investigations and inquiries tied to the Engel List. The State Department will also provide bilateral assistance and support to its foreign counterparts in Guatemala, Honduras, and El Salvador. Through that assistance, it plans to strengthen special prosecutorial offices and financial institutions in those countries to combat corruption, money laundering, financial crimes, extortion, and other crimes.

Supporting the Discovery and Enforcement of Cross-Border Tax Crimes

These goals feed quite neatly into the Biden administration’s ongoing U.S. Strategy Against Corruption, which is a global, multi-decade strategy to strengthen global anti-corruption networks, prosecute money launderers, and promote transparency within the global financial market. The U.S. Strategy has a strong tax component – for more information on how the U.S. Strategy intersects with taxation, please see my four part series: America’s Opening Bid on Countering Corruption; America’s Anti-Corruption Strategy Part Two: Modernizing the Fight; America’s Anti-Corruption Strategy: Putting Bad Actors on Notice; and America’s Anti-Corruption Strategy: Stronger Together With Allies. It is clear that the Engel List could complement the U.S. Strategy by generating some tax-related investigations, particularly involving real estate, which often is a conduit for money laundering.

The first Engel List, released in July 2021, named 55 individuals, some of whom allegedly engaged in money laundering. If any of the alleged money laundering involved U.S.-based financial accounts or property, that activity could trigger inquiries from the Department of Justice and Internal Revenue Service, which are increasingly casting a wider net to prosecute cross-border tax crimes. This is very clear in the U.S. government’s enactment of FIRPTA and its ongoing scrutiny of whether foreign individuals with U.S. property are compliant with their U.S. tax filing obligations. For more information on FIRPTA, please see my article: Are You FIRPTA Compliant? IRS Targets Foreign Holders of U.S. Real Estate.

Global Accountability

The Biden administration has made amply clear over the past few years that America’s battle against corruption is global, and that it will use the long reach of its laws to target financial-related crimes by foreign actors. While the Engel List and U.S. Call to Action in Central America target a rather narrow group of actors, they feed into a broader trend of requiring tax and financial transparency and accountability in the global system, which will have ripple effects for broad groups of individuals and investors with cross-border financial accounts, assets, and financial activity.

Tax Transparency in Latin America and the Engel List

Part two of a two-part series on the Engel List

Illicit financial flows and corruption are a major concern across Latin America, as governments in the Americas try to stop billions of dollars from leaving the region every year due to tax evasion and other financial crimes. They are a major concern for the United States as well, which recently launched an anti-corruption campaign focusing on three nearby Latin American countries: Guatemala, Honduras, and El Salvador.

The trio – known as the Northern Triangle of Central America – worry U.S. policymakers because deep rooted poverty in those countries has enabled a corruption and a migration crisis that is spilling over into the U.S.

In response, U.S. lawmakers in December 2020 enacted the United States-Northern Triangle Enhanced Engagement Act, which requires the U.S. State Department to devise targeted anti-corruption sanctions aimed at activity in the three countries. It also requires the State Department to publish an annual report of corrupt and undemocratic actors, known as the Engel List, in honor of the Act’s legislative sponsor, former U.S. Representative Eliot L. Engel. (You can read our prior coverage in the following article: Global Tax Implications of the Engel List).

In the wake of this U.S. campaign – the U.S. call to action in Central America – it is worth taking a look at the tax transparency and enforcement landscape within those three countries. The Organization for Economic Cooperation and Development (OECD) has been working with tax administrations across Latin America to improve tax transparency, and on May 3, 2022 published a report detailing its latest findings. The report, Tax Transparency in Latin America 2022, shows that tax authorities across Latin America are slowly improving their tax exchange networks, but also shows that the region as a whole needs more time to improve its strategy.

It further provides crucial information about tax transparency in the three Northern Triangle countries that could prove invaluable in the U.S.’ ongoing battle against corruption.

OECD Steps In

In 2018, the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes launched a Latin America-focused program to help tax administrations in those countries strengthen their information sharing activities. That program, called the Punta del Este Declaration, includes:

• implementing and improving exchange of information systems,
• implementing automatic exchange of information systems, and
• implementing beneficial ownership transparency systems.

Guatemala, Honduras, and El Salvador all belong to the Punta del Este Declaration and are at relatively new stages of their tax transparency journeys.

Early Results of Northern Triangle Tax Transparency Programs are Promising

According to the report, Guatemala recently received help from the Global Forum on beneficial ownership transparency and on implementing a so-called “exchange of information on request” system to better help the country share data requested from other taxing authorities. Honduras is at an even earlier stage of its journey, and in 2021 participated in an induction program where it was mentored on tax transparency standards. El Salvador is very new to the program, as it signed the Punta del Este Declaration in 2021, but its signature is a promising start.

Once the three countries are able to fully implement their information exchange systems, the revenue and information benefits could pay dividends. According to the OECD, Latin American countries have collected €3.6 billion in additional revenue since 2009 due to exchange of information on request systems. Information exchange systems have also helped Latin American countries enhance their voluntary disclosure programs, which have collected billions over the years. Between 2009 and 2021, Latin American voluntary disclosure programs have collected nearly €26 billion according to the OECD.

The Effort is Global in Reach

This effort to increase tax transparency across Latin America is precisely what governments need to combat corruption and hold bad actors accountable. For the U.S., these developments come at an opportune time. As the U.S. continues its Central America campaign, enhanced tax information exchange systems in Guatemala, Honduras, and El Salvador could play a role in its fight. This is important not just for the U.S. or the three targeted countries, but also for the ongoing global fight against tax evasion.

Author:

• Jack Brister, Founder, International Wealth Tax Advisors
• To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at info@iwtas.com or call the IWTA New York City office at 212-256-1142

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