Closing the 'Shell Bank' Loophole

52 Pages Posted: 19 Apr 2023 Last revised: 22 Sep 2023

See all articles by Noam Noked

Noam Noked

The Chinese University of Hong Kong (CUHK) - Faculty of Law

Zachary Marcone

The Chinese University of Hong Kong (CUHK) - Faculty of Law

Date Written: February 25, 2023

Abstract

The U.S. Senate Committee on Finance has recently published a report on its investigation into the “shell bank” loophole. The report reveals that this loophole was used in the largest individual tax evasion case in U.S. history. This loophole undermines tax enforcement globally because it can be exploited by U.S. and foreign tax evaders. This Article is the first to assess the Finance Committee’s findings and policy recommendations.

This Article makes three contributions. First, it argues that the Finance Committee has overlooked the root cause of the “shell bank” loophole. Contrary to the Finance Committee’s view that this is a problem of weak enforcement due to inadequate resources, this loophole results from a flawed design of the legal rules in the U.S. Treasury regulations and a problematic interpretation of the relevant intergovernmental agreements.

Second, the Article evaluates the Finance Committee’s recommendations for addressing this loophole. It shows that they are neither effective nor feasible. Instead, it proposes to close the loophole by amending the relevant regulations and changing the interpretation of the intergovernmental agreements. Unlike the Finance Committee’s recommendations, this solution does not require Congressional action or additional resources.

Third, the Article considers the international challenges created by this loophole. It argues that a similar solution should be applied to the international Common Reporting Standard to eliminate this loophole globally.

Keywords: Tax Evasion, Shell Banks, FATCA, CRS, Tax Loopholes, Financial Institutions, Senate Investigation

JEL Classification: K34, G28, H26

Suggested Citation

Noked, Noam and Marcone, Zachary, Closing the 'Shell Bank' Loophole (February 25, 2023). Virginia Journal of International Law, Vol. 64, No. 1, 119-170, Available at SSRN: https://ssrn.com/abstract=4402680

Noam Noked (Contact Author)

The Chinese University of Hong Kong (CUHK) - Faculty of Law ( email )

6/F, Lee Shau Kee Building
Shatin, New Territories
Hong Kong, Sha Tin
Hong Kong

HOME PAGE: http://www.law.cuhk.edu.hk/app/people/prof-noam-noked/

Zachary Marcone

The Chinese University of Hong Kong (CUHK) - Faculty of Law ( email )

6/F, Lee Shau Kee Building
Shatin, New Territories
Kowloon, Sha Tin
Hong Kong

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