Central American governments have made serious efforts to fight corruption, promote financial transparency, and increase tax transparency, and the Biden administration has announced it will join the fight. This fight stems from a recent US call to action to promote economic opportunity in the region.

A key part of the US call to action in Central America is to publicly sanction corrupt actors who engage in financial or political misdeeds in a report known as the “Engel List”. This report is named after former U.S. Representative Eliot L. Engel, who sponsored legislation authorizing the sanctions during his chairmanship of the U.S. House Foreign Affairs Committee. Although the Engel list is relatively new – the first batch of names was released in July 2021 – the list could have significant ramifications, especially from a tax perspective. The Engel List’s strategy could lead to increased enforcement of US tax laws that apply to foreign persons, such as the Foreign Real Estate Investment Tax Act (FIRPTA).

A region under siege

Why is the Biden administration focusing on Central America? Central America’s so-called Northern Triangle, which includes Guatemala, Honduras and El Salvador, is mired in poverty. The depressed economic situation has generated a host of socio-economic problems for the region that have ripple effects in the United States.

According to Congressional testimony, political challenges, violence by drug-funded criminal gangs, and lack of jobs in the formal economy have destabilized the Northern Triangle. Testimony of Daniel F. Runde, senior vice-president; and William A. Schreyer, president; and director of the Americas program at the Center for Strategic and International Studies, noted that destabilization has implications far beyond the three countries that make up the Northern Triangle.

“All the issues in Central America have had international repercussions, including an ongoing migration crisis at the US-Mexico border,” Runde said.

In December 2020, US lawmakers decided to resolve the Northern Triangle crisis by enacting the United States-Northern Triangle Enhanced Engagement Act, which has a few key elements. The US State Department is required by law to publish an annual report – the aforementioned Engel List – of corrupt and undemocratic actors. The law also requires the State Department to design targeted anti-corruption sanctions aimed at activity in the three countries.

The Engel List: Exiting the Bad Actors

The Engel list targets three types of corrupt activity:

• Corruption related to government contracts;
• bribery and extortion;
• The facilitation or transfer of proceeds of corruption, including proceeds obtained through money laundering.

Individuals on the Engel List will be subject to extensive sanctions, including blocking of their U.S.-based real estate assets, ineligibility for U.S. visas or admission to the United States, revocation of existing U.S. visas, and potential penalties.

It is important to note that the government will engage in several national and international partnerships to carry out this work. The State Department will partner with state attorneys general, the U.S. Department of Justice, and other U.S. government agencies to manage corruption-related investigations and investigations related to the Engel List. The State Department will also provide bilateral assistance and support to its foreign counterparts in Guatemala, Honduras, and El Salvador. With this assistance, he plans to strengthen the special prosecution offices and financial institutions in these countries to fight corruption, money laundering, financial crimes, extortion and other crimes.

Support the discovery and enforcement of cross-border tax crimes

These goals align well with the Biden administration’s current U.S. Anti-Corruption Strategy, which is a decades-long global strategy to strengthen global anti-corruption networks, prosecute money launderers, and promote transparency in the global financial market. The US strategy has a strong tax component – ​​for more on how the US strategy intersects with taxation, please see my four-part series: The US Opening Offer on Anti-Corruption; US Anti-Corruption Strategy, Part Two: Modernizing the Fight; US Anti-Corruption Strategy: Warn Bad Actors; and America’s Anti-Corruption Strategy: Stronger with Our Allies. It is clear that the Engel list could complement the American strategy by generating investigations related to taxation, in particular concerning real estate, which is often a vehicle for money laundering.

The first Engel list, published in July 2021, named 55 people, some of whom were allegedly involved in money laundering. If any of the alleged money laundering involved financial accounts or assets based in the United States, this activity could trigger investigations by the Department of Justice and the Internal Revenue Service, which are increasingly expanding their network. to prosecute cross-border tax crimes. This is very clear from the US government’s enactment of FIRPTA and its ongoing review of whether foreign individuals with US assets are complying with their US tax filing obligations. For more information on FIRPTA, please see my article: Are You FIRPTA Compliant? The IRS targets foreign holders of US real estate.

Global Responsibility

The Biden administration has made it clear over the past few years that America’s battle against corruption is global and that it will use the long reach of its laws to target financial crimes committed by foreign actors. While Engel’s List and the U.S. Call for Action in Central America target a rather narrow group of actors, they fuel a broader trend to demand fiscal and financial transparency and accountability in the system. globally, which will have ripple effects for large groups of individuals and investors with cross-border financial accounts, assets and financial activity.