The ongoing debate surrounding the Republican tax bill has brought to light a controversial proposal that could have significant implications for U.S. efforts to combat illicit finance. Nestled within the bill’s extensive pages is a section introducing a 3.5 percent tax on money sent from the U.S. to other countries by non-U.S. citizens, commonly known as outgoing remittances. While the initial proposal calls for a 3.5 percent tax, discussions in the Senate suggest the possibility of increasing this levy to 15 percent. This proposed tax has sparked concerns among financial experts and immigrant communities alike, highlighting its potential to impact the financial landscape in unexpected ways.
The Regressive Nature of the Tax
The proposed remittance tax is seen by many as regressive, primarily targeting working-class immigrant communities. Implementing such a tax could prove to be an administrative challenge and would likely generate relatively little revenue. Beyond the financial implications, the tax threatens to undermine two decades of progress in formalizing financial flows. Since the 9/11 attacks, efforts have been made to bring remittance flows within the purview of U.S. anti-money laundering and counter-terrorism financing (AML/CFT) laws. These efforts have been notably successful, with over 97 percent of U.S.-outbound remittances now sent through formal channels.
Formal vs. Informal Remittance Channels
The shift to formal remittance channels is a positive development from an AML/CFT perspective. Formal remittances are subject to U.S. laws, including the Bank Secrecy Act and the Patriot Act, providing vital safeguards for tracking financial transactions. Know Your Customer protocols and Suspicious Activity Reports enable the government to monitor money flows. Moreover, institutions offering formal remittance services are regulated at both federal and state levels.
However, the proposed tax could drive more individuals to resort to informal remittance channels, such as hawala. This system operates outside the formal financial structure, lacking AML/CFT safeguards and posing significant risks. The U.S. Treasury has identified informal remittances as high-risk, pointing to cases involving international political corruption, drug trafficking, and terrorism financing.
Challenges and Risks
The implementation of the proposed tax would require financial institutions to collect extensive data on consumers’ immigration status, a move that could deter individuals from using formal financial services. This concern is not limited to undocumented immigrants; many American citizens may also face difficulties due to a lack of readily available identification documents.
A survey of Latino immigrants in five U.S. cities revealed that the fear of deportation influences their choice of financial services. Sixty-four percent of respondents indicated they would change how they send money home if the remittance tax were implemented, with 41 percent opting for informal channels to avoid revealing immigration information.
Potential Impact
The United States is the largest source of remittances globally, with approximately $200 billion sent abroad annually. If a significant portion of remittances shifts to informal channels, it could result in billions of dollars moving through unregulated systems that lack AML/CFT safeguards. This could undermine the very objectives of the proposed tax and potentially create profit centers for criminal activities.
In conclusion, while the proposed remittance tax aims to raise revenue, its implications extend far beyond financial considerations. By potentially driving individuals away from formal financial systems, it poses significant risks to efforts in combating illicit finance. Lawmakers must carefully weigh these risks to avoid unintended consequences that could undermine progress made in securing financial flows.
Note: This article is inspired by content from https://thefactcoalition.org/remittance-tax-illicit-finance-yansura-milin/. It has been rephrased for originality. Images are credited to the original source.