Closing the 'Shell Bank' Loophole

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