July 15, 2016 | Commentary on Department of the Treasury, Taxes

The Treaty to End Financial Privacy

Don't judge a treaty by its title, no matter how bureaucratically mundane it may sound. Exhibit A: The Protocol Amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

The U.S. Treasury Department is marketing the agreement as just another tax treaty, because such treaties are usually positive or benign. But this is no ordinary tax treaty. If ratified by the Senate, it will lead to substantially more transnational identity theft, crime, industrial espionage and financial fraud. Moreover, it will enable authoritarian and corrupt governments to suppress political opponents and religious or ethnic minorities. Sens. Rand Paul (R-Ky.) and Mike Lee (R-Utah) have wisely put a hold on the treaty. But the administration is trying its best to shake it loose. Last week, President Obama publicly derided Paul's opposition to the treaty as "quirky." It's not. Opposition to the treaty is principled, and of tremendous importance to the American people.

The protocol is part of a new and extraordinarily complex tax information-sharing regime that involves two international agreements and two intergovernmental initiatives from the Organization for Economic Cooperation and Development (OECD). If implemented, governments worldwide would automatically share bulk taxpayer information. This would give private financial and other information on both foreign and U.S. taxpayers to foreign governments that are hostile to the U.S., corrupt or have inadequate data safeguards. It will also add yet another layer to the voluminous compliance requirements imposed on financial institutions, hitting small banks and broker-dealers especially hard.

Currently, the Treasury may share only requested information about particular taxpayers, as authorized under the original Convention on Mutual Administrative Assistance in Tax Matters. If the U.S. ratifies the protocol and implements the new OECD standard, Washington would automatically ship private financial and tax information — including Social Security and other tax identification numbers — to China, Russia, Nigeria, Kazakhstan, Indonesia, Argentina, Colombia and nearly 70 other countries.

The Chinese and Russian governments are thought to be actively engaged in cyber theft, including major hacks of the federal Office of Personnel Management, the IRS and various commercial databases. But if the U.S. ratifies the protocol and implements the OECD standard, Beijing and Moscow won't need to hack anymore; Washington will simply hand over the information they want as part of a bulk transfer.

In principle, the shared information can only be used for tax purposes. But the idea that the Russian, Chinese and other countries' tax authorities will not share the information with their intelligence services and business cronies is extraordinarily naive. It is also naive to think that the U.S. government could detect this intragovernmental transfer of data between foreign government agencies or ensure that it does not take place.

Nor is ill-will necessary to make this arrangement dangerous. Developing countries such as Nigeria, Kazakhstan, Indonesia, Argentina and Colombia don't have sophisticated cybersecurity technologies and personnel. Their databases of bulk taxpayer information will be quite vulnerable to hackers.

Authoritarian governments will be able to abuse the system, using shared information to suppress dissidents, political opponents and disfavored ethnic or religious minorities. The regimes will know precisely who has financial resources outside the country and where.

The protocol will also aid governments that want to confiscate their citizens' wealth for "merely" economic reasons. And corrupt officials will seek to sell the data to criminal organizations engaging in identity theft or looking to identify targets for kidnapping or extortion.

Financial and personal privacy is a key component of life in a free society. Free societies allow individuals a private sphere free of government involvement, surveillance and control. The U.S. Constitution enshrines this right in its Fourth Amendment. The protocol would largely end financial privacy.

The Senate should not ratify the protocol.

About the Author

David R. Burton Senior Fellow in Economic Policy
Thomas A. Roe Institute for Economic Policy Studies

Originally published in The Hill