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QI: Stop This Train - Or It Will Stop You!
see also our comment: The IRS Money Laundering Machine: QI Regulations
More Government & Protection for Mafia, Less Legitimate Investments & Privacy
and the Barrons Editorial:Pyrrhic Victory: IRS turns foreign banks into its tax agents

Dear colleague,

The Washington-based Institute of International Bankers (IIB) has just called on the U.S. Internal Revenue Service (IRS) to prevent self-inflicted serious market disturbances by taking interim measures on its ill-prepared Qualified Intermediary (QI) scheme (see IIB letter of 23 Nov, on the web at: BARRON'S just sounded the alarm with its editorial of 4 Dec 2000 ("The Pyrrhic Victory of the IRS - Following the Flag: The IRS enlists foreign banks and brokers for global tax enforcement", by Thomas G. Donlan  at:  The WASHINGTON TIMES also took up the issue with its edpage contribution of 3 Dec ("Big brother or financial privacy?",  by Daniel Mitchell of the Heritage Foundation  at:  And the awareness is rapidly growing among key members of the U.S. Congress that the IRS, behind their back, may have vastly overstepped its bounds.  All of which adds to the pressure to promptly reconsider this extraordinary piece of lex americana universalis.  Thus, we invite you to consider - even at this late hour - whether your institution's related exposure indicates a more active rôle, e.g. by signing up as a co-plaintiff of our imminent complaint and request for injunctive relief to the competent U.S. district court.
It is as if the Berlinwall had fallen the other way.  At a seminar on "Global Money, Sovereignty and Privacy", held on October 6 by the libertarian CATO Institute in Washington, H.E. Muhammad Abdul Ghaffar, the Ambassador of Bahrain to the U.S., was not alone to sense and express a growing frustration and dismay over the apparently unstoppable cancer called lex americana universalis with its blatent and ever less challenged infringements on national - notably fiscal - sovereignty, be it directly or by way of such international organizations as the OECD and its international finance police arm, the FATF.  Under ever more flimsy reasons and pretenses, like "harmful tax competition", "combating tax avoidance", etc., unelected bureaucrats find hardly any more any opposition to their self-serving plain-levelling designs, including black-listing of sovereign countries and cracking the time-tested, constitutionally adopted protective privacy and other laws of sovereign countries.  To date the most flagrant - and market-upsetting - aggression comes in the form of the below-outlined new withholding regulations which the IRS plans to impose shortly on an unsuspecting world.

We understand your country's own Know Your Customer (KYC) rules to have been approved by the IRS.  With the free flow of things, on 1 January 2001, the IRS' Final Qualified Intermediary regulations would also become effective for your financial institution, be it that until then you would have agreed to become a tax collector and extended arm of the IRS in the form of a qualified intermediary, or that you will have to endure the consequences of being a non-QI.

We have gone beyond merely complaining and wringing our hands.  Instead we have explored the available options and are in the process of executing the most promising measures for bringing the IRS' out-of-control QI train to an early halt.  To this effect, we have retained legal counsel in Geneva and Washington.  Our lawyers tell us that a fast-closing window of "opportunity exists to mount a challenge to the QI Regulation based on possible violations of the U.S. Administrative Procedure Act", and that the "QI Regulation is 'arbitrary, capricious, an abuse of discretion, and not in accordance with law' because it:
-  was promulgated without due regard to controlling treaty obligations,
-  compels foreign nationals to make disclosures conflicting with their fiduciary duties and the financial disclosure laws of their own countries,
-  extends the reach of the IRS beyond the bounds of its authority", etc.
All of which offers hope, serious grounds and practical U.S. pathways for obtaining at least a further - i.e. the third - delay for enactment of this ill-considered, ill-prepared and ill-founded piece of bureaucratic law-making.

Thus, as a dignified and genuine alternative to give in to inadmissable foreign pressures, we suggest you to consider your institution's related exposures and, in the event, to promptly and effectively join forces with like-minded bankers and financial intermediaries who would like to see this out-of-control train stopped in its track.  Your institution can do that openly by throwing its hat into the ring as a co-plaintiff or, more discretely, by effectively supporting our impending U.S. court action against the IRS (the draft brief is available on request).

You may also simply forward this e-mail to interested colleagues and clients of yours, as individual actions can make a dent.  As you remember, early last year, the U.S. Treasury and three other regulatory agencies were swamped with over 300.000 e-mail and fax protest messages, thus forcing the withdrawal of their ill-considered KYC rules.  So, if you share our worries on the IRS's attempt to impose on the world financial markets similarly ill-advised anti-market, anti-sovereignty and anti-privacy rules and QI agreements, we suggest you to express your concerns by writing to the Secretary of the Treasury (with copies to your national authorities and to us) at either of the following addresses:

The Hon. Lawrence H. Summers, Secretary
U.S. Treasury
1500 Pennsylvania Ave., NW
Washington DC  20220
t: 001202-6221100
f: 001202-6222961
In addition to the below-attached fully hyperlinked QI talking points for U.S. lawmakers, further background material can also be consulted on the web at:
Please feel free to forward this communication to colleagues of yours.  If interested or wishing to share your observations and comments, please contact us by return e-mail to:
Meanwhile, we remain, with Season's greetings, sincerely yours,

Anton Keller, Secretary
Swiss Investors Protection Association

Geneva, 4 December 2000


BARRONS editorial, 4 Dec 2000:
"The Pyrrhic Victory of the IRS - Following the Flag: The IRS enlists foreign banks and brokers for global tax enforcement,  by Thomas G. Donlan

                  For those who believe the recent American prosperity has rested on a flow  of foreign capital seeking investment opportunities on these shores, a test is under way. Acting in zealous pursuit of evildoers, the Internal Revenue Service claims a tax lien on every investment held by foreign banks and brokers whose clients might turn out to be American taxpayers.

                  Those Americans, you see, might be trying to evade taxes on interest, dividends or capital gains. So unless the foreign financial institution happens to be located in a country the Treasury designates as cooperative, and unless the institution also pledges to investigate its own customers, there will be the IRS to pay before any money leaves the U.S.

                  How much? Starting January 1, a withholding tax of 31% on interest, dividends and gross proceeds of securities sales will be levied on all securities transactions that are not carried out through "Qualified Intermediaries," unless the unqualified intermediary identifies its client so the IRS can verify the client's claim that no American tax should be due.

                  Unidentified clients of unqualified intermediaries will be subject to the withholding, even if they are not Americans, even if they are not subject to any U.S. tax. If they won't identify themselves, the withholding will become a permanent confiscation.

                  American taxpayers with a passion for privacy, however, will be able to keep their secrets and pay their taxes if they deal through a Qualified Intermediary.

                  There has not yet been a rush for the exits, but imagine the coming annoyance of foreign investors who own stocks and bonds traded on U.S. markets whose bankers have neglected to become Qualified Intermediaries. Especially imagine the annoyance of those who sell their stocks or bonds at a loss, since the withholding applies to the gross proceeds, not to taxable net profit.

                  The Treasury's plans are hot news in countries with rigorous bank secrecy laws and those that the Treasury considers havens for Americans violating tax and other laws. The Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama, Philippines, Russia, St. Kitts & Nevis, and St. Vincent & the Grenadines appear on a Treasury list of countries with "deficiencies" in their controls on money laundering. About 20 other countries are on another blacklist, maintained by the international Organization for Economic Cooperation and Development, that identifies "uncooperative" tax havens. Financial institutions in such countries still can make the grade as Qualified Intermediaries, but only if the Treasury approves their local tax laws, especially those requiring them to know their customers.

                  The Cayman Islands has already been given such an exception and other countries, notably Israel and the Bahamas, have been arguing and pleading for similar recognition. Financial institutions fear it may be almost impossible for them to conduct international business without status as Qualified Intermediaries.

                  Even in acceptable secret-banking countries, such as Switzerland and Luxembourg, financial institutions still have to clear substantial hurdles before they can become Qualified Intermediaries. After all, the IRS is trusting them to know their customers and assess the liabilities of their American taxpayer customers while keeping their identities secret.

                  International financial experts say major Swiss banks have been particularly adept at dealing with the U.S. paperwork, because they saw a competitive advantage in providing tax compliance and legal secrecy to clients with U.S. tax liabilities and other needs for privacy. The new tax regime may be better than the original IRS goals of subjecting all foreign investors to withholding and identification. But we doubt the writ of the IRS could run so far, especially into Switzerland. The IRS had to co-opt the hundreds of billions of dollars of investments on U.S. markets. The Qualified Intermediary rules are not so much a compromise as they are an example of dividing to conquer.

                  But what has the IRS really conquered? The first obvious result of the new rules is that they will reduce the supply of foreign capital for investment in American companies. A second is that more American companies will incorporate themselves offshore and keep their securities off the U.S. markets.

                  Neither result will be good for America. The IRS has confused the pursuit of income tax with the pursuit of happiness. The value of the damage could be far greater than any possible revenue gain.

*        *        *

WASHINGTON TIMES, edpage contribution, 3 Dec 2000:
Big brother or financial privacy?  by Daniel Mitchell

     A federal judge in Miami recently gave the Internal Revenue Service a green light to seize credit-card records from several Caribbean banks. This wholesale invasion of financial privacy is justified, the IRS says, because some American taxpayers may have set up offshore accounts to evade taxes.
     The ruling has sparked a big debate. On one side are tax collectors and politicians who feel the agency must be able to collect all the information it needs to ensure that everyone is playing by the rules. On the other side are privacy advocates and foreign policy experts. The privacy advocates don't want to give government carte blanche to rummage through financial records. The foreign policy experts worry we will create a bad precedent - one that could be used against America in the future - by trying to impose U.S. law on banks chartered in other countries. ... (snip)

     Consider the alternatives. If we don't fix our tax code, we will have to endure either increasing tax evasion or a greater loss of individual privacy. In an attempt to stop the former, the IRS is pushing new "QI" regulations designed to find U.S. taxpayers hiding money offshore by forcing foreign financial institutions to become informers.
     But is this a good idea? Not according to Andrew Quinlan of the Washington-based Center for Freedom and Prosperity. "The IRS is trying to kill a fly with a sledgehammer," he says. "These costly and intrusive new regulations will drive away foreign investment and harm our economy."
     Withholding is a better approach. The IRS gets its share, and people can protect their privacy. But this will only happen if the tax laws are simplified.

Daniel J. Mitchell is the McKenna senior fellow in political economy at the Heritage Foundation.

The IRS Money Laundering Machine: QI Regulations
More Government & Protection for Mafia, Less Legitimate Investments & Privacy
by  Anton Keller and Andrew F. Quinlan (url: ¦ .../stammsbv.htm)

     Geneva/Washington, 22 November 2000  -  The U.S. Internal Revenue Service (IRS) promulgated new regulations which, effective 1 January 2001, would impose a world-wide confiscatory backup withholding tax of 31% on money invested in U.S. securities from overseas - over US$ 6000 billion - except on money where the IRS knows its beneficial owners or accepts them to be non-U.S. persons.  Even capital invested abroad would be exposed to this new IRS taxation - if only the order came from America or involved a U.S. account.  Providing IRS protection at 31% would suit some Mafia kingpins just fine.  However, the rest of us may be tempted to run for the door.  An investment stampede out of the U.S. market can thus not be excluded.  Also, foreign tax collectors could seek reciprocal treatment with foreign rules imposed on U.S. citizens and businesses at home.  Behind the back of Congress, the IRS thus not only stretches but unwisely ventures beyond its prerogatives.  And while significant adverse effects would be a certainty, experts foresee no appreciably higher tax revenues or a real dent on U.S. tax evasion.

    As the opposite of what tax reform and tax competition are all about, the IRS has been hiding this latest power grab behind a convenient multi-purpose smoke-screen.  Ostensibly designed to catch tax dodgers investing in the U.S. market through off-shore centers, this anti-market, anti-sovereignty and anti-privacy tax and its enforcement instrument, the QI regulations (; now at address:,,id=150934,00.html) are in fact ill-considered and dangerous to U.S. interests.  For they also void or erode the investment incentives associated with comparatively low U.S. taxes, they put off-shore branches of U.S. financial institutions at a competitive disadvantage, and they jeopardize a key motor of the market economy, i.e. reliable financial privacy.  Fundamentally flawed, their enactment has already been twice postponed.  Yet, the legally required cost/benefit analysis is still lacking.  The IRS should thus withdraw the proposal and reconsider how best to serve the U.S. economy without infringements on foreign jurisdictions.

What exactly are QI Regulations?
     Qualified Intermediary (QI) regulations are extraordinarily complicating texts with which the IRS seeks to globally impose a backup withholding tax regardless of its market-upsetting risks and without congressional approval.  Theoretically, it applies only to "U.S. persons"- i.e. U.S. citizens, dual nationals, green card holders, U.S. residents - who invest in the U.S. market through financial institutions abroad.  In practice, all recipients of U.S.-source income or capital gains are thus faced with a choice: either they withdraw their investments from the U.S. before the end of this year, or - as long as they are not, to the satisfaction of the IRS, identified or shown to be non-U.S. persons - they risk their U.S. investments to be slammed with a confiscatory backup withholding tax of 31% (i.e. 31% on principal, not on interest or gains)!  This tax is to be collected on behalf of the IRS by Qualified Intermediaries (QIs) which, in return, will be able to provide some sweeteners to investors.  Overseas financial institutions practicing IRS-approved Know-Your-Costumer rules can apply for entering into an agreement with the IRS for directly enforcing these new regulations as QIs, with IRS-approved and QI-paid fiduciaries serving as auditors acting under U.S. laws.

Did Congress ever intend to let the IRS impose, on its own, a world-wide confiscatory tax?
No, if the original intent & purpose of the U.S. taxcode and other applicable authorities are a guide.

What are we talking about in terms of foreign investments in the U.S.?
    In its latest report, the U.S. Federal Reserve Board stated the total foreign-held U.S. financial assets to be US$ 6277 billion ("Flow of Funds Accounts of the United States", Federal Reserve Board, Washington 9 June 2000 -   Nobody seems to have a clear idea whether the undeclared money originating from U.S. persons amounts to much of the total investments from abroad, and whether the risks involved in this IRS witchhunt will not far outweigh the benefits.   Some observers see the QI regulations as a direct cause for both U.S. persons and foreign investors to at least temporarily withdraw their investments from the U.S. market before the end of the year.  The negative investor advice currently circulating among investment advisers in the U.S., France, Great Britain, Italy, Japan, Switzerland, Luxemburg and elsewhere may indeed snowball - at considerable risks to the U.S. economy.  To be sure, the usual impact and cost/benefit analysis required by U.S. law are still missing.  The bounds of administrative lawmaking are overstepped when untested, far-reaching and globally impacting directives and norms like the IRS' QI regulations are enacted without congressional guidance and affirmative action by the constitutional lawmaker.

Why Are the QI Regulations Not Only Harmful to U.S. Interests but Helping the Mafia?
     U.S. persons determined to avoid U.S. taxes, will always find lawful ways, e.g. by shifting their investments out of U.S. assets.  They don't need the anonymity offered by the QI Regulations.  Only the Mafia does - for reasons of its own.  Mafia treasurers would appreciate the guaranteed anonymity obtained through a 31% protection payment to the IRS.  The QI regulations might thus not only fail their advertised purpose, but would likely cause significant damage to U.S. interests, e.g. by being:

1.    Bad for the market
    The regulations would hit all persons investing in the U.S., non-U.S. firms included.  Failure to qualify as QI would mean higher withholding taxes, yet qualification would force the institutions and investors to endure considerable red tape and costly regulatory burdens.  The solution: to invest someplace other than America.  Professionals have thus warned that the new regulations “could trigger an exodus from U.S. securities.”
    The QI regulations would create a discriminatory system imposing different tax rates on global investment.  Also, international tax specialists that have commented have all criticized these regulations for their extraordinarily bewildering complexity, amounting to a new non-tariff trade barrier.  Indeed, for foreign institutions and investors – particularly from the non-English speaking world – it would be difficult to decipher the intricacies of U.S. regulations even without the QI's numerous cross-references to the Internal Revenue Code. As such, they would violate open trade rules.
    In order to comply, foreign institutions would have to endure large information technology costs, legal fees and on-going auditing costs.  Small- and medium-sized companies typically do not have in-house legal assistance and are not used to engage costly outside counsel for interpreting “60-odd pages of American legalese.”   As Wall Street has no monopoly for foreigners to invest, QI compliance costs and burdens may thus lead many institutions to avoid the U.S. market altogether.

2.    Bad for sovereignty
    The IRS is adding new personnel to accomodate hundreds of foreign institutions which, under threat of higher withholding taxes, it is deputizing for enforcing US information-gathering requirements and the collection of congressionally unapproved confiscatory and other U.S. taxes.  The QI regulations would also interfere with nations which genuinely respect financial privacy.  This puts long-term U.S. interests at risk as aliens may insist on and receive reciprocal treatment.  The specter of foreign taxmen, backed by the OECD's international police arm FATF, harrassing U.S. citizens and companies in the United States may not be to the liking of many U.S. lawmakers either.  Not least as this would mean new regulatory burdens for U.S. institutions and investors.  And as it could violate and generally erode the respect for existing tax and other treaties.

3.    Bad for privacy
    Foreign institutions would be forced to engage in a massive data collection exercise to determine whether or not their clients are "U.S. persons".  This is an unreasonable and disproportionately time-consuming and costly task, particularly given the complex rules governing dual citizens, green card holders, varying tax rules for different types of investments, and the use of multi-tiered structures and multi-country entities.  As such, the QI regulations represent an attempt by the IRS to export Know-Your-Customer rules that force financial institutions to spy on their customers, i.e. to act contrary to their legal duties and traditional fiduciary obligations.  American consumers revolted against similar provisions that regulators attempted to impose in the U.S.  Despite of this and behind the back of Congress, the IRS seeks to get these discredited invasive rules adopted overseas and - by way of the Paris-based Organization for Economic Cooperation and Development (OECD) - to impose them by stealth on the U.S. market.

4.    Bad for foreign branches of U.S. financial institutions
    The QI regulations entail a competitive disadvantage on foreign branches of U.S. financial institutions in that all investments which their U.S. person clients hold anywhere must be identified to the IRS, whereas U.S. persons banking through their QI host country competitors would need to report only investments made in the U.S. market.  This is seen to be in contradiction not only with non-discrimination host country statutes but with treaties binding on the United States.

Anton Keller is Secretary of the Swiss Investors Protection Association
( and Andrew F. Quinlan, a former congressional aide, is
an adviser to the Coalition for Tax Competition (

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